The Markets This Week

The bull case for stocks took its biggest hit of the year last week, but nothing seems able to prevent this market from reaching new highs.

The Dow Jones Industrial Average advanced 12.01 points, or 0.6%, to close at 21,206.29, while the Standard & Poor’s 500 rose to 2439.07. The Nasdaq Composite gained 1.5% to 6305.80. All three indexes closed the week at record highs.

This comes despite economic data that cast shade on what has kept many an investor bullish on stocks this year. Despite the death of the so-called Trump trade—the idea that stocks would get a boost from tax cuts, fiscal spending, and deregulation—optimistic investors could always point to a potential pickup in economic growth, even without policy action. Friday’s payrolls report, which showed that a mere 138,000 U.S. jobs had been created in May, wasn’t exactly fatal for that view, but it certainly presents a quandary.

“This is more worrisome than the twist and turns of politics,” says Morgan Stanley Investment Management portfolio manager Andrew Slimmon.

Still, the Federal Reserve Bank of Atlanta’s closely watched GDPNow forecast model is predicting second-quarter economic growth of 3.4%—none too shabby, unless compared to the 4% growth it was predicting the day before the payrolls data were released. Slimmon says he’ll be watching closely to see if that number rises or falls as new data are released in the coming weeks. “We need data that validate 3% GDP growth, or the market will go nowhere,” says Slimmon, who remains optimistic about future gains.

What alternative do investors have? The 10-year Treasury note yields just 2.16%. With payouts that meager, stocks still possess their charms, especially when the U.S. economy continues to grow modestly and the rest of the world looks stronger, says Manning & Napier senior analyst Greg Woodard. “Equities seem to be a reasonable investment,” he says. “The path of least resistance” is for stocks to go higher.

That may be less worrisome than it sounds. Doug Ramsey, chief investment officer at the Leuthold Group, notes that the market’s rally is quite broad, despite concerns that too many of the recent gains have come from giants like Apple (ticker: AAPL) and (AMZN). He notes that it’s not just the Dow industrials, the S&P 500, and the Nasdaq Composite that are hitting new all-time highs, but that the Dow Jones Composite Average and the Dow Jones Utilities Average are as well, while the Dow Jones Transportation Average and the small-company Russell 2000 are within a stone’s throw of theirs.

Even the advance/decline line, a measure of advancing stocks versus declining ones, is sitting at a record high, something that has historically meant that a bull market has at least another three to six months to go. Ramsey says he wouldn’t be surprised if the S&P 500 hit 2,600 before the end of the summer, even if he can’t offer a reason why.

“I tend to like rallies that are somewhat mysterious,” he says. “It means that the market is [anticipating] good news that we’ll read about weeks or months down the road.”

It’s just a question of what that good news will be.

(Source: Barrons Online)

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