No, it isn’t Dow 20000. But the Dow Jones Industrial Average has perhaps achieved a more significant market milestone.
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The Dow’s 8% gain in the five weeks after Donald Trump’s victory is the biggest surge following any U.S. presidential election in history. The rally, which has the blue-chip average on pace for its fastest 1,000-point rise ever, has been accompanied by a sharp jump in bullish sentiment.
When stocks move this far this fast, caution is usually warranted. This time, history might suggest otherwise.
There have been five other instances in which the Dow jumped at least 5% in a five-week period following a presidential election. Over ensuing six-month time frames, it continued rallying four of five times, gaining another 10%, on average.
The most recent example came in 1996. The Dow jumped 5.3% in the five weeks after Bill Clinton was re-elected and then surged another 18% over the following six months. It had similar reactions following elections in 1900 and 1924. The only time the pattern didn’t prevail was in 1952 when Dwight Eisenhower was elected. The Dow jumped 5.3% immediately after the election, but then fell 7.5% over the ensuing six months.
Not surprisingly, the sharp rally today has made investors say they feel better about the market’s future prospects. A survey by the American Association of Individual Investors has quickly swung from sharp pessimism to optimism. The latest reading on Thursday showed a sixth week in a row that bullish sentiment was above its historical average.
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What stands out is the rate of change—how quickly investors have turned so cheery—that might be problematic. In early November, only 23% of AAII respondents said they were bullish, among the lowest readings of the year. By Thursday, that had jumped to 45%, the third-highest reading in 2016 and one of the sharpest swings in the current bull market.
A similar move in sentiment took place in May 2013, just as stocks had rallied right before the so-called taper tantrum. Right on cue, bullish sentiment peaked in late May and stocks fell in the following weeks.
But investor sentiment is often most useful as a contrarian indicator when it hits extremes. It isn’t there now. One of the AAII’s lowest bullish readings ever came on March 5, 2009, which almost precisely marked the beginning of the current bull market. The most bullish reading was captured in January 2000, just two months before the dot-com bubble peaked.
Today, the absolute level of bullishness is still far from stretched. Bullish sentiment has remained below 50% for 102 consecutive weeks. “It has become seemingly impossible for the bullish camp to get a majority,” analysts at Bespoke Investment Group wrote Thursday.
On the doorstep of Dow 20000, this rally has defied nearly all conventional wisdom. As crazy as it sounds, it might still have legs.