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Stock rally signals possible melt-up into year-end and beyond

  • Stocks could continue to rally into year-end and beyond, in a synchronized global rally and on the prospects that tax cuts will boost earnings.
  • The market surged Tuesday, satisfied that Fed governor Jerome Powell would be very similar to Fed Chair Janet Yellen when it comes to policy.
  • The market also raced higher Tuesday afternoon, after the Senate Budget Committee voted to advance tax legislation to the full Senate.
  • The market could continue to move higher in the new year, especially if analysts start to raise earnings estimates based on tax cuts.

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A new chief for the Fed and the promise of tax cuts propelled stocks to record highs in a rally that could well continue into the year-end and beyond, strategists say.

Fed governor Jerome Powell testified before Congress Tuesday and markets were satisfied that his policy views are similar enough to Fed Chair Janet Yellen's, in that he would push for gradual rate hikes. The broader market rallied into record territory as bank stocks surged, and the S&P financial sector jumped nearly 3 percent in its best day since March 1.

A second big catalyst for the market came Tuesday afternoon when the Senate Budget Committee voted to advance the tax bill, now headed to the full Senate for a vote. The Dow jumped 255 points to 23,836, even after a brief afternoon sell-off when North Korea fired off a ballistic missile. The S&P 500 rallied 25 points to 2,627, and the Nasdaq climbed 33 to 6,912. Even the small-caps Russell 2000 shot up 23 points to close at a record high of 1,536.

"We've gone up uninterrupted really this entire year," said Todd Sohn, technical analysts with Strategas Research. "I would not argue against the idea that we are in some sort of melt-up here. This is a broad-based rally from many corners of the U.S. and the world. We have markets all over the world participating in this move, in this melt-up."

But strategists say the market could take a pause before getting a final kick up into year-end. "The next thing is when they [Congress] vote and it [tax bill] gets passed. Do they sell the news? Right now, it's moving up in anticipation of the vote. That's the next thing to look for," said Scott Redler, partner with T3Live.com.

But Redler said the market is trading in a healthy fashion, and banks stole the lead from tech Tuesday.

"High beta tech is really strong, but the Dow was up 250 and Apple was down. Amazon was upgraded by Goldman Sachs and it was down," he said. "Instead of rolling corrections, we're having rolling rallies from one sector to the next. Instead of looking for the next sector to correct, you look for the next sector to digest and go."

Analysts say there could be negative catalysts on the horizon but, if so, stocks are likely to face only a shallow correction. One of those could be the Dec. 8 deadline on a government shutdown.

"We were thinking nothing could ever go wrong in 1999, and eventually it did. You can't let your guard down as an investor because you think nothing can go wrong," said Ed Keon, managing director and portfolio manager at QMA, a unit of PGIM.

"Historically markets do tend to sell off after good things happen. That's possible," Keon said. "But on the other hand, if it's a month from now and you do have a new tax bill, analysts are going to look around and say we've got to raise these earnings estimates. It's hard to have a correction when you have rising earnings estimates, and you have a market that's going to have good growth."

Keon said he does expect the market to continue to move higher. "So many things have gone pretty well, and we have not had anything terrible happen for a while. There's still the risk of a government shutdown. There's a risk the tax bill won't make it."

"It looks pretty favorable," he said. "The way we're positioned — if the market does shoot up that would be great but we're not so invested that if we move sideways or have a correction that it would be disastrous."

But even if there is a negative catalyst for stocks, there is a strong positive force at work for the market as it heads into its best month of the year.

"The big question is can this strength continue with this big run we've seen, and history does suggest December is a solid month," said Ryan Detrick, senior market strategist at LPL Financial. In the month of December, the S&P 500 has been up 1.6 percent on average since 1950, he said. "There is the likelihood that things are almost too good in the near term. There could be a little bit of a pullback and that could cause a rally."

But he added that December's stock market has never been the worst of the year, and the worst S&P 500 performance year-to-date was the 0.04 percent decline in the month of March.

"Into year-end usually strong stocks get stronger as people want to have the best stocks on the books and weak sectors get weaker, but there aren't that many weak sectors," said Redler.

Analysts say stocks could continue to run higher into year-end, but Sohn warns that years where there are very shallow sell-offs are usually followed by years with deeper sell-offs and more volatility. The biggest sell-off in 2017 was a 3 percent move between March and April.