The Dow Jones Industrial Average finally crossed the 20,000 mark, after enjoying an impressive rally since Donald Trump’s election. Psychologically important - we all like round numbers, it's sign that the Trump rally is back on after a bit of pullback ahead of the inauguration,

It also confirms that the ‘great rotation' from bonds to stocks is definitely upon us. Fears about protectionism come second to optimism about inflation and growth – for now at least.

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Animal Spirits

Donald Trump’s election victory, far from roiling markets, has been greeted with universal optimism about what it means for global growth. Something like $3trillion has been pulled from bonds and $3trillion pumped into equities. President Trump is bound to take credit for the rally, and he may well be justified to some degree.

Animal spirits have been unleashed. US indices are rocking all-time highs and the Dow has finally smashed 20,000 after rising 10% since the election in early November.

The question now is how long can this last?

One argument says that Trump will usher in a Reaganesque shift in the US economy, fuelling a massive reallocation of investment from cash to productive capital. Between the election and the inauguration it was all about the psychology of animal spirits – there was not a huge amount of new information as such – it’s just that people were prepared to pay more for stocks. It’s hard to stop that kind of momentum once it takes a grip. (Now we do have some more data, as explained below).

Bears will say we've already had a multi-year bull market for equities and that this is just the final push higher before it all unravels. However, bull markets normally only turn into bear markets on an expected downturn in the real economy. There is little evidence that the US is heading for recession – quite the reverse as Trump is ushering a new era of pro-business policies that affirm growth prospects.

We are seeing a massive shift in investor sentiment that has seen money pour out of bonds and into equities around the world. This is a major recalibration in global stocks and bond markets – ie, not a bubble in the pure sense, although it might be rising faster than is natural.

A bubble, as Greenspan noted, is very hard to stop once it starts. And while his words cooled the market briefly, it quickly turned positive again and continued to rise and rise in the years after. Investors have to judge whether the real returns from equities are worth the prices asked. At the current velocity there is a chance that this calculation could change and we could see a correction, but if this is a real rotation from bonds into stocks, ending a 30-year bond bull market, there is still a huge amount of cash piled up that could yet pour into equities and power further gains through 2017. It might not be too long before 21,000 is in sight.


Laws Changing

Trump’s first steps as president have confirmed much of what investors had hoped for and that he’s extremely pro-business, which is driving this renewed rally. Environmental laws that have tied the hands of energy companies, will be swept aside. Regulation of banks is expected to be lighter. Critically, corporate taxes are forecast to be cut significantly.

Earnings

As CNBC's Jim Cramer points out, the stock market rally is not happening in a complete vacuum. Earnings are rising and expected to grow again. Employment has been rising for years, boosting consumer spending. which is good for consume discretionary and consumer staples.

Higher earnings at banks and the expectation of Federal Reserve rate hikes is boosting financials. A resurgent oil market has lifted energy stocks.

So we have animal spirits returning, thanks in part to Trump, driving a generational shift from bonds to stocks. We have a series of new laws boosting some sectors. And we have a return to earnings growth thanks to a number of factors.