The market is having a feel-good moment—maybe a little too good.

The Dow Jones Industrial Average gained 544.99 points, or 2.1%, to 26,616.71 last week, while the Standard & Poor’s 500 index rose 2.2%, to 2872.87. And the Nasdaq Composite climbed 2.3%, to 7505.77. All three indexes closed at all-time highs Friday. For the S&P 500, it was the 14th record high of the year, setting a record for the number of new highs in January.

And why shouldn’t the market feel good? Credit sparkling results from the likes of Intel (ticker: INTC) and Caterpillar (CAT). Fourth-quarter economic growth was lighter than expected, but strong enough, especially given that tax cuts could provide a boost in the quarters ahead. The Davos elite came away feeling relieved after President Donald J. Trump loudly proclaimed that “America is open for business,” and his administration is said to be readying a $1.7 trillion infrastructure plan that could be revealed next week. Party on, right?

That very well could be.

But there’s also a point where feeling good leads to bad behavior. U.S. gross domestic product rose at an annual rate of 2.6% during the fourth quarter, missing economists’ forecasts of 2.9%. But dig into the numbers and you see one area of major strength—consumer spending.  Not everyone is celebrating. Gluskin Sheff’s chief economist, David Rosenberg, notes that rising markets have made Americans feel wealthier, so they’ve been spending more and saving less. “This is a classic late-cycle development,” he says.

Consumers aren’t just spending money on clothes, cars, and whatever else catches their eye—they’re also buying stocks. Investors have put $24 billion into equities during each of the two most recent weeks, notes Bernstein strategist Inigo Fraser-Jenkins, a big change from 2017, when they withdrew $9 billion during the last six months of the year. That’s not worrisome—yet—but if investors buy stocks at just half that rate in the next four weeks, it would be. “We are not saying that will happen, but it quantifies how sentiment can change,” Fraser-Jenkins says.

(Source: Barrons Online)