Dow 21,000 Is Already Here

Trump's surprising 'presidential' speech... The 'Trump Trade' resumes… Dow 21,000 is already here… The odds of a March rate hike are soaring… Inflation nears the Fed's target… More good news for the U.S. economy… Insiders are rushing for the exits…


More than seven in 10 Americans who watched President Trump's speech last night came away with a positive reaction, according to a new CNN poll...

And 57% of viewers had a very positive reaction. And while it wasn't technically a State of the Union address, CNN notes this is the most positive reaction to a U.S. president's address to Congress since Barack Obama's first speech in February 2009.

It's likely no coincidence that most media outlets also noted Trump's speech marked a significant shift in character. As the Wall Street Journal reported this morning...

President Donald Trump, after reaching the White House with fiery rhetorical attacks and a combative message, pitched his agenda to voters and Congress with language that was much more presidential and traditional in tone. He also issued a call for American renewal in stark contrast to the aggressively nationalist posture he outlined at his inauguration just over a month ago...

His speech largely avoided his signature attacks on his adversaries and the political establishment. While he once again highlighted the challenges of violent crime in some urban communities and drew attention to crimes committed by illegal immigrants, he didn't repeat his denunciation of "American carnage" in his inaugural address.

Although there were no major policy shifts – he called for reworking trade deals and cracking down on illegal immigration without using the controversial "America First'' label to describe them – the edges of his most incendiary rhetoric were sanded off. It was the Trump doctrine with aspirational overtones.

Despite the conciliatory tone, Trump again shared few details about how his economic plans would be carried out...

But the market apparently heard enough for now. The so-called "Trump Trade" resumed in earnest this morning...

U.S. stocks surged to new all-time highs, pushing the Dow Jones Industrial Average above 21,000 for the first time. The U.S. Dollar Index rose as much as 1% to a new seven-week high. And interest rates – as measured by the yield on the benchmark 10-year U.S. Treasury note – jumped more than 10 basis points to above 2.45%.

Recent remarks from Federal Reserve officials likely helped, too...

Four separate officials – Dallas Fed President Robert Kaplan, Philadelphia Fed President Patrick Harker, New York Fed President William Dudley, and San Francisco Fed President John Williams – spoke on Tuesday. And each was more "hawkish" than the last. As news service Reuters reported last night...

New York Fed President William Dudley, among the most influential U.S. central bankers, said on CNN that the case for tightening monetary policy "has become a lot more compelling" since the election of President Donald Trump and a Republican-controlled Congress.

John Williams, president of the San Francisco Fed, said that with the economy at full employment, inflation headed higher, and upside risks from potential tax cuts waiting in the wings, "I personally don't see any need to delay" raising rates. "In my view, a rate increase is very much on the table for serious consideration at our March meeting." Williams, unlike Dudley, is not a voter this year on policy, but his views are seen as influential among his colleagues...

The comments on Tuesday before Trump's speech included remarks from Philadelphia Fed President Patrick Harker calling for three rate hikes this year.

Clearly, the market was listening... According to the CME Group's FedWatch Tool, the probability of a March interest-rate increase has more than doubled since yesterday to 68.6%. Financial news network CNBC reports some other measures put the odds above 80%.

As Craig Erlam – senior market analyst at currency-trading firm Oanda – wrote in a note this morning, it appears the stock market no longer fears rate increases but rather sees them as further evidence of a strengthening economy...

I think the Fed's clear optimism about the economy, even when not factoring in a Trump boost, is feeding the positive sentiment in the markets... Investors don't fear rate increases like they have in the past, instead it's the pace of tightening that they're focused on, and three hikes this year is clearly palatable.

The latest inflation data are likely to strengthen the Fed's case...

This morning, the U.S. Department of Commerce reported its personal consumption expenditures ("PCE") index – the Federal Reserve's preferred measure of inflation – jumped 0.4% in January. It's now rising at a 1.9% annualized rate...

This is up from just 1.6% in December... and just shy of the Fed's official 2% target.

In related news, data continue to suggest the U.S. manufacturing sector is recovering...

Last month, we noted two of the Fed's most important manufacturing indexes were soaring. As we wrote in the February 16 Digest...

The Philly Fed's Manufacturing Business Outlook Index nearly doubled to 43.3 this month, up from just 23.6 in January.

This is the biggest one-month gain since June 2009. It's also the index's highest level since 1984, indicating manufacturing in the mid-Atlantic region is growing at its fastest pace in more than three decades.

Today's report follows a similar one from the New York Fed on Wednesday. Its Empire State Manufacturing Index rose to a more modest 18.7 in February. But this still represents a two-year high, and a nearly 200% rise from January's 6.5 level.

Together, these reports suggest the Institute for Supply Management's ("ISM") Manufacturing Index – a more widely followed national gauge of manufacturing activity – could make a surprise move to the upside this month.

This morning, the ISM reported just that...

The firm said its national manufacturing index jumped to a better-than-expected 57.5%. This is up from 56% last month, and it is the measure's highest level since August 2014. (Readings above 50 indicate growth, while readings below 50 indicate contraction.)

The ISM said 17 of the 18 industries it tracks reported growth this month, and shared several (mostly) positive comments from industry insiders. From the report...

  • "Business [is] improving and lead times are extending by two or more weeks." (Chemical Products)
  • "Very positive outlook for this quarter. Production goals have been adjusted multiple times and increased each time due to demand." (Computer & Electronic Products)
  • "Product demand continues to be solid." (Plastics & Rubber Products)
  • "Bookings are heavy early in the season. Expect robust first half of the year." (Primary Metals)
  • "Demand still outstrips capacity. Competitors have announced heavy capital investments to increase capacity." (Food, Beverage & Tobacco Products)
  • "Sales and business continue to be strong and increasing." (Machinery)
  • "Business holding steady in Q1." (Transportation Equipment)
  • "Medical device manufacturing is still strong." (Miscellaneous Manufacturing)
  • "Even though oil and gas prices are on the upswing, we still face a tough 2017 and will continue to save on costs." (Petroleum & Coal Products)
  • "Major focus on commodities and potential [for] further inflation." (Electrical Equipment, Appliances & Components)

But not everyone is so optimistic...

Despite a booming stock market and positive signs for the economy, a new report from equity-research firm Vickers says corporate insiders are selling their own shares at the fastest pace in three years. As CNBC reported on Tuesday...

Chief executives may profess loving a pro-business president in the White House, but they are saying something else with their money, and that could be a worrisome sign.

Chief executives and other corporate insiders are selling stock hand over fist now that the quarterly earnings season is over, a report from Vickers Weekly Insider shows. Transactions by insiders are restricted around a company's report.

"Insider selling has jumped again, and this time to levels rarely seen," analyst David Coleman wrote in Monday's note. In the last week, insiders' sale transactions on the NYSE outnumbered their purchase transactions by more than 11 to 1... The 11.47 reading is 3.5 standard deviations above the mean, according to Coleman.

Now, to be clear, this doesn't mean stocks will crash. It doesn't even mean a significant decline is certain. But according to Vickers, insider selling at these elevated levels suggests at least a short-term pullback is likely...

The last time we saw... such elevated levels was in early 2014, when the total reading hit 8.3 and the NYSE/ASE reading was 6.16. In response, the S&P 500 fell [6%] from 1844 to 1741 between 1/22/14 and 02/03/14. On February 14, 2007, the NYSE/ASE reading was 11.77 and the Total reading was 7.99 Again, the S&P 500 fell – this time [5%] from 1455 to 1387 within a matter of days.

Again, we remain bullish...

History suggests this bull market has further to run. But as we noted yesterday, stocks haven't declined by more than 5% since early 2016... And they've absolutely soared since November's election.

A correction is overdue. Sooner or later, it will arrive... And fear and volatility will return. Stay long, but keep an eye on your trailing stops.

New 52-week highs (as of 2/28/17): Axis Capital (AXS), Boeing (BA), Berkshire Hathaway (BRK-B), C.H. Robinson Worldwide (CHRW), iShares Select Dividend Fund (DVY), Huntington Ingalls Industries (HII), Altria (MO), and Monsanto (MON).

The kudos for Stansberry's Credit Opportunities continue to roll in. Send your questions, comments, and concerns to feedback@stansberryresearch.com. As always, we can't provide individual investment advice, and we're unable to respond to every e-mail, but we do read them all.

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Regards,

Justin Brill
Baltimore, Maryland
March 1, 2017