No End in Sight for Stocks' Longest Streak in 20 Years

By Daniel Kruger and Akane Otani Features Dow Jones Newswires

Stocks continue their steady march higher, notching milestones not seen in more than 20 years, yet many investors see few obstacles to the seemingly endless run.

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The S&P 500 closed at its sixth consecutive record Thursday, its longest streak of highs since 1997. A gauge of expected swings in the index fell to an all-time low. Investors don't see many worries ahead: The economy keeps growing at a slow but steady pace, corporate earnings remain healthy and investors are betting a tax overhaul will further boost profits.

That isn't what many analysts and investors expected coming into this year, when they thought bond yields would rise as the economy heated up, and stocks would stall as valuations remained stretched. Instead, bond yields are lower than where they ended last year -- the benchmark 10-year U.S. Treasury note stood at 2.352% Thursday, down from 2.446% at the end of 2016 -- and inflation remains stubbornly short of the Federal Reserve's 2% target.

Stocks have kept climbing. The Dow Jones Industrial Average and Nasdaq Composite closed at fresh highs Thursday.

"It's kind of like the 1996 moment where Alan Greenspan himself called stocks irrationally exuberant" and the rally continued for three more years, said Jason Pride, director of investment strategy at Glenmede, which has about $37 billion in assets under management. Stocks are expensive now, but they "are not at extremes," he said.

The S&P 500's current record streak is the longest since the eight highs ending June 17, 1997, during the dot-com boom.

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The markets have been so calm that some analysts and investors have expressed concerns that money managers are growing complacent. The CBOE Volatility Index, known as Wall Street's "fear gauge," fell 4.6% Thursday to 9.19, surpassing its record closing low of 9.31 set in December 1993.

Stock-market gains have been broad, spanning regions and sectors. Japan's Nikkei Stock Average closed at its highest level since August 2015 on Thursday. The Stoxx Europe 600 rose for nine straight trading days through Tuesday, its longest winning streak in more than two years.

Several U.S. companies have posted outsize gains this year. In the Dow industrials, Boeing Co. has risen 66%, while Caterpillar Inc. and Visa Inc. each have added 36%. Stock advances have also been widespread, with all 11 major sectors of the S&P 500 in positive territory for the month so far.

October brings back painful memories of the financial crisis and the crash of 1987 for many investors and analysts. And the long economic expansion and eight-year bull market have some saying this rally can't go on forever.

There are signs of skepticism, with some investors pulling money out of U.S. stocks even as they hit records.

Mutual funds and exchange-traded funds tracking U.S. equities posted outflows in the second quarter, according to fund tracker EPFR Global, the first quarterly outflows for the funds since the third quarter of 2016. Stock-trading volumes on major U.S. exchanges have hovered below average levels for the year in recent weeks, which some analysts say reflects investors' lack of conviction in the rally.

Yet few see signs of an imminent downturn.

"The market's seeing smooth sailing ahead for the economy right now," said David Klaskin, chief investment officer of Oak Ridge Investments, which has $3.4 billion in assets under management. Stocks are expensive, but with central banks remaining accommodative, that's helping indexes trudge on, he said. Mr. Klaskin has been cautious of fast-growing companies that are among the best performers this year; he acknowledges those bets haven't paid off.

U.S. consumer prices remain sluggish, but other patches of the economy have perked up. U.S. economic output grew at a 3.1% annual rate in the second quarter, slightly stronger than previously thought. September auto sales rose at their fastest pace of the year. A gauge of manufacturing activity reached a 13-year high last month, while service-sector activity rose to its highest level since 2005.

Because Hurricanes Harvey and Irma likely slowed hiring last month, economists are projecting just 80,000 jobs added in September -- less than half this year's monthly average growth of 176,000 -- when the Labor Department releases its monthly employment report Friday. But the labor market has been strong, with unemployment hovering near a 16-year low in recent months.

"The rally has been akin to a relay race," said Brian Jacobsen, multi-asset strategist at Wells Fargo Asset Management, which has $450 billion in assets under management. "Every time there's been a slowdown, the baton has been passed to another part of the economy."

Mr. Jacobsen is optimistic about the potential for corporate tax changes and expects shares of financial companies, small-capitalization stocks and makers of both discretionary and staple consumer products to perform well.

Steven Chiavarone, assistant vice president and portfolio manager at Federated Investors, which has $360.4 billion in assets under management, said the firm recently increased its position in small-cap stocks because it thinks smaller companies stand to benefit more from a tax overhaul. Those firms tend to generate more revenue domestically.

"Policy is unfolding in a positive way relative to what we think were overly muted expectations in the market," Mr. Chiavarone said. "We feel pretty good going into the back half of the year," he said, adding that he expects another strong quarter of earnings growth.

U.S. economic growth has been strong enough to support corporate earnings but slow enough to keep the Federal Reserve on a gradual path of interest-rates increases, keeping a lid on yields. That combination also has helped major indexes climb by double-digit percentages in 2017.

The Fed last month signaled that it plans to raise interest rates one more time in 2017 and three times in 2018, while starting to shrink the $4.2 trillion bond portfolio it amassed in its efforts to stimulate the economy. Central banks in the U.K. and Canada are also poised to tighten policy.

While many investors anticipate the proposed Republican tax framework will boost profits, further lifting stock prices, they also expect it will add to a budget shortfall and require the government to borrow more, potentially driving yields higher.

Some analysts and investors say a substantial rise in bond yields is one of the potential threats to the stock market rally, since it could raise borrowing costs for businesses and consumers, potentially dragging on economic activity. Also, low yields have helped some investors justify buying stocks that look pricey. However, rising yields have yet to become a real threat.

--Amrith Ramkumar contributed to this article.

Write to Akane Otani at akane.otani@wsj.com

(END) Dow Jones Newswires

October 05, 2017 20:04 ET (00:04 GMT)