Stocks hit new record highs last week with support by increased evidence that the U.S. economy is approaching escape velocity. The Fed has been the principal support for the equity markets the past five years. Despite zero percent interest rates and several episodes of quantitative easing, monetary policy has been less than effective in stimulating economic growth.

The resurgence of the U.S. economy is now accelerating due to the increase in oil supplies that has caused the plunge in prices. Evidence of this was seen last week offered by the Labor Department’s report on November job creation that was much stronger than expected.

It is estimated that the plunge in oil prices from $115 to $67 is equal to a $75 to $100 billion tax cut. This is most important to middle-income Americans who have been struggling with the disappointing lack of wage growth since 2008. The collapse in oil prices is a two pronged event for the economy as it raises the level of disposable income while keeping a lid on inflation.

The November Employment Report showed that most of the new jobs were in the consumer discretionary segment. This will eventually spread to other sectors as business confidence in the expansion gains traction. A stronger economy will result in increased top and bottom line growth. This is particularly important to the financial markets where valuation levels are stretched, which should offer room for stocks on the upside in 2015.

In addition to the improving fundamentals, the technical backdrop for the stock market tilts bullish.  The trend is decidedly positive. Momentum weakened the past two weeks but that is likely due to an overbought market condition following seven weeks of uninterrupted upside progress.

Sentiment, with the exception of the options data, shows a rising level of optimism that could potentially stall the rally short-term. December, however, is typically associated with increasing optimism as investors look to a new beginning next year. As a result, any near-term weakness should be limited in both time and price.

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Article provided by Robert W. Baird & Co. with the authorization of its author for Evan Guido, Vice President, Financial Advisor at the Sarasota office of Robert W. Baird & Co., member SIPC. The opinions expressed are subject to change, are not a complete analysis of every material fact and the information is not guaranteed to be accurate. 

Evan R. Guido

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