Yes, we have not even hit Dow 20,000 yet and analysts are already talking about Dow 25,000.
That would be a 25% rally from our current level and definitely possible IF the economy is going to improve, tax rates are going to be reduced and regulations lifted. The biggest impact will be the tax code changes.
The new administration continues to claim they are going to cut the corporate tax rate to 15%. When most corporations currently pay around 35% that is a monster boost to their bottom line. That means their net profits are going to rise significantly. Various analysts have said they believe S&P profits would rise roughly 15% across the board. That means the market would immediately begin pricing in those gains and stocks could easily rise 10% to 15% or more over the next two years.
There is also the cash repatriation issue. Trump wants to drop the tax to 15% but require certain uses for at least some of the money. The rest could be used for dividends and stock buybacks. A year ago there was a $2 trillion number being tossed around for cash held captive overseas. Several months ago that number rose to $2.5 trillion as more analysts studied the problem. Recently it has risen to $3 trillion but I believe we are getting well into the hype zone as the estimate rises. Secondly, companies are not going to just suddenly bring all the cash back. Many companies have uses for those funds and they should not be lumped into the total. Regardless of what final number comes back to the USA, it should be $1 trillion or more and that will fund a lot of dividends and buybacks and that lifts stock prices. That specific piece of legislation could be ready to go this summer.
Before we start talking about Dow 23,000 or even 25,000 we have to get past January first. There is a strong potential for a January correction for the reasons I have listed before. We should be dip buyers when/if that correction appears.
I believe the S&P is at risk for a decline back to 2,190-2,200. Given the strength of the recent rally, that would actually be only a mild dip. The current high close was 2,271. A drop back to 2,190 would only be 81 points or -3.5%. A real correction of 10% would knock us back to 2,043 and I do not see that happening. We spent far too long in the 2125-2175 range building a floor for a correction to move below that level unless market sentiment has really changed.
The Dow has risk to about 18,850, which would be a 5.5% decline. A full correction would take it back to about 17,900 but I seriously doubt we will see that level without a major headline event. A minimal decline would be the 19,000 level or about -4.5%. The Dow has been supported by the financials primarily Goldman Sachs. Goldman closed at $241 on Friday and has risk back to $210 or 31 points. That equates to about -240 Dow points all by itself. Obviously if Goldman is correcting the rest of the Dow components will be adding to that decline.
The Nasdaq Composite has a solid top at 5,485 and should not decline as far as the other indexes because it has not rallied as far or as fast. The rotation dip in early December killed the momentum and left the Nasdaq trailing well behind the Dow. If by chance the Nasdaq fell over 6.5% that next step would be a killer back to 4,600 but I doubt we will see that kind of a drop.
The small cap Russell 2000 Index always overshoots on the top and the bottom. The 20.1% post election gain at the December high close of 1,388 was far more than the other indexes. That suggests any decline will also be far worse. The 1,310 is too close to stop a material bout of selling. The uptrend support from Sept 2015 is too light to stop a determined decline. Once the index hits the congestive resistance between 1250-1200 it should slow considerably. My worst case forecast would be 1,200 but I think 1,250 is more likely even though that is not a clear support point.
The odds of a decent selloff in January are very high but never 100%. We need to prepare for a steep decline but also be ready to buy a dip. There is plenty of money still on the sidelines waiting for an opportunity. It remains to be seen if they buy any dip in volume until after the terror risk passes surrounding the inauguration on January 20th. I am sure there will be some bargain hunting beforehand but the big rally may not begin until after that event.
Enter passively and exit aggressively!
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