The stock market is close to new record highs in a replay of what it tried but failed to accomplish after last year’s correction. The 2015 rally came within an eyelash of new highs late last year only to fail and crash again into the New Year. As the S&P 500 hovers again just below record highs, many investors believe the stock market is setting up for yet another disappointment.

But the contemporary rally looks and feels much more likely to break to new record highs than it did last year. Much of the character of the 2016 stock market rally is very different from the character of the 2015 rally.

First, the 2016 rally is much “broader” than the participation exhibited by the 2015 stock market rally. The equally-weighted S&P 500 index has strongly and persistently outpaced the market-cap weighted index. That is, this rally has much broader participation than was the case in 2015 when the stock market recovered from the correction but it was led by a small number of S&P 500 stocks while most underperformed.

This is also highlighted by the outperformance during this rally of small cap stocks and by the equal-weighted Value Line index of 1700 stocks, both of which did poorly or only matched the S&P 500 index in the 2015 rally. Does broader participation suggest more sustainability in the current rally?

Second, unlike the 2015 rally, the stock market is not facing any pressure from the bond market this year. The stock market rally last year was pressured by an almost 50 basis point rise in the 10-year treasury yield which ultimately contributed to its failure to establish a new high. Today, by contrast, despite the stock market knocking on the door of a new all-time high, the 10-year treasury yield is currently almost identical to where it was when the stock market bottomed in mid-February!

Third, U.S. economic momentum is far more supportive for the current rally than it was in 2015. Take for example the Bloomberg U.S. economic surprise index. While this index was essentially flat to down throughout the 2015 stock market rally, it has risen persistently during the contemporary rally. The 2015 rally faced flat economic momentum and rising bond yields. Today, however, the stock market enjoys a nice combo – rising economic momentum without any rise in bond yields!

Finally, in sharp contrast to last year, the current stock market rally has barely improved investor sentiment. Almost hard to believe we are within an eyelash of new record highs and investor sentiment today is as bad as it was at the correction low in August 2015! When the stock market rallied from its low in 2015, calls for a renewed bull market were commonplace. Today, despite even a bigger recovery in the stock market from its February low, most still expect another failed attempt at new highs.

Climbing a wall of worry has perpetually represented a positive force in this bull market. While it lapsed briefly in 2015, since the January collapse in the stock market this year, “fear” is back providing a good fundamental underpinning for this rally!

Overall the current rally looks and feels much more sustainable compared to the correction rally in 2015. This rally is benefiting from much broader participation, a total lack of competitive yields pressures, increasingly positive U.S. economic momentum and continued investor pessimism.

Our guess is the S&P 500 index will soon breach the overhead resistance of old record highs and perhaps rise to about the 2200 level. Just some food for thought as stocks attempt to finally break out northward!

Source:  James Paulsen in Barron’s

http://www.barrons.com/articles/4-reasons-why-this-stock-rally-has-legs-1465581022#