After an unexpected post-election rally carried the U.S. stock market to new record highs, stock prices have trended sideways in the last three months. Is the recent peak in the stock market suggesting a correction is nearing? Perhaps even a bear market? As is usually the case, there are good reasons to be cautious. After all, this bull market is already one of the longest on record, valuations are stretched, volatility has been uncommonly low suggesting investor complacency, U.S. real GDP growth slowed significantly in the first quarter, and the Federal Reserve has raised the Fed funds rate twice since December, threatens more hikes yet this year and is about to begin to shrink its balance sheet.
For these reasons, some near-term turbulence in the stock market would certainly not be shocking. However, rather than suggesting increased investor caution is warranted, we believe the trendless stock market of the last few months is underscored by several factors combining to refresh this rally.