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What Fueled the Recent Market Rally?

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Markets made new highs

Since Donald Trump was elected president on November 8, 2016, US equities have risen steadily, making new highs at regular intervals. The benchmark S&P 500 Index (SPX-INDEX) (SPY) has risen 33.2% since Trump took office. The Nasdaq Composite Index (COMP-INDEX) (QQQ) has risen even more, by 43.5%, while the Dow Jones Industrial Average Index (DJIA-INDEX) (DIA) has risen the most, by 44.5%.

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Higher economic optimism

A sharp rise in the market (VOO) was driven by the all-around economic optimism fueled by a rebound in economic growth, improving corporate earnings, government reform initiatives, and higher liquidity. According to UBS, the EPS (earnings per share) of companies in the S&P 500 could rise 9.1%, aided mainly by the new tax reform legislation. Bank of America-Merrill Lynch estimates that its earnings will rise 14%.

Markets ignored headwinds

Although there were many tailwinds that pushed the markets (IVV) higher, we can’t ignore the even higher headwinds that had the capability to cause sharp fluctuations in the market but were largely ignored. The remarkable feature of the rally was the extremely low levels of volatility that hadn’t been seen in decades.

Although there was strong optimism that the benign economic environment would support further gains, complacency could have caught investors unaware. In this series, we’ll see why the recent low volatility was different in many ways. We’ll also discuss factors such as domestic issues, geopolitical concerns, and monetary policies being unwound by central banks that could cause higher volatility in 2018.

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