The Markets This Week

Late Friday, Republican leaders pulled their health-care bill before it could be voted on. That hasn’t pulled the rug out from under the bull market, however.

Sure, the Dow Jones Industrial Average dropped 317.90 points, or 1.5%, to close at 20,596.72 last week, its largest weekly tumble since September 2016. The Standard & Poor’s 500 index fell to 2343.98, while the Nasdaq Composite slipped 1.2%, to 5828.74.

And that loss would seem to justify the talk on the Street that the failure to repeal Obamacare jeopardizes the Trump administration’s tax and infrastructure plans—and could cause the market to crater. The fact that the worst-performing stock in the S&P 500 on Friday was Martin Marietta Materials (ticker: MLM), which supplies the gravel and stones used in roads and other infrastructure projects, would only seem to add to the evidence.

Yet Friday’s drop was muted. The Dow, which was the biggest loser among the major averages, fell just 59.86 points, or 0.3%, while the Nasdaq rose 0.2%. “Markets breathed a sigh of relief on the notion that if Republicans can agree to [put the ACA aside] and move on towards tax reform and deregulation, then this is bullish,” says Jason Ware, chief investment officer at Albion Financial Group.

In fact, the major damage was done on Tuesday, when the S&P 500 fell 1.2%, ending its 160-day streak without a 1% drop. And while that decline provided ammunition for those predicting an imminent collapse, it was simply one bad day. “It is, of course, natural,” says Daniel Chung, CEO of asset manager Alger. “Things literally can’t go up forever.”

That hasn’t stopped the bears from looking for danger in every piece of data. Bank lending, for instance, has slowed since the election, and some observers have pointed to that fact as a sign that the animal spirits that were supposed to juice the economy have been a mirage. Deutsche Bank economist Torsten Sløk, however, notes that bank lending is a lagging indicator, and that it usually follows the ISM Manufacturing survey with a delay. The fact that the ISM data has been rising—it recently hit its highest level in two years—suggests that bank lending could increase in the months ahead. “It’s a red herring,” Sløk says.

(Source: Barrons Online)

The Markets This Week

The Standard & Poor’s 500 index ended a six-week winning streak as tumbling oil prices and a looming Federal Reserve rate hike caused stocks to stumble.

The S&P 500 fell to 2,372.60 last week, while the Dow Jones Industrial Average dropped 102.73 points, or 0.5%, to 20,902.98, their largest declines so far this year. The Nasdaq Composite dipped 0.2% to 5,861.73, its first weekly decline in seven weeks.

It’s a wonder the losses weren’t any bigger. The week started with the release of the widely criticized Republican plan to repeal and replace Obamacare, finished with a jobs report that virtually guarantees a rate hike at next week’s Federal Open Market Committee meeting, and saw oil drop below $50 a barrel. The downward pressure on the market, however, was limited.

That was, in part, because of the strength of the employment data, which was neither too hot nor too cold. The U.S. economy added 235,000 jobs in February, beating economist forecasts for 200,000, but not the blowout number that could have forced the Fed to raise rates by more than a quarter percentage point. If anything, the data just confirm what we’ve known for a while now: The economy is growing, and one rate hike is unlikely to do much damage, says MKM Partners strategist Michael Darda, who called the March Fed meeting “largely irrelevant.”

There’s still a strong likelihood of some sort of economic stimulus plan from the Trump administration sometime this year. Yes, it might be delayed by wrangling over the Republican proposal to repeal and replace the Affordable Care Act, which was met with derision from Democrats, moderate Republicans, and hardcore conservatives. But the fact that tax cuts and infrastructure projects are even being considered at a time when the U.S. economy is adding 200,000-plus jobs a month is “unprecedented,” says Richard Bernstein, chief investment officer at Richard Bernstein Advisors. “We’re going to add more stimulus on top of this.”

Still, a sense of unease hangs over the market, especially after the price of oil fell 9.1% last week, sinking to its lowest level since November. And the market is certainly overdue for a selloff. The S&P 500 generally drops 3% to 5% every two to three months, says Binky Chadha, chief global strategist at Deutsche Bank. The index has now gone more than four months without such a decline. Tumbles of 5% or more, meanwhile, have historically occurred every five to six months, Chadha says, something that hasn’t occurred since the Brexit vote eight months ago.

But just because the market is due for a correction doesn’t mean it will get one. While sentiment has played a big part in the rally, so has the fact that investors didn’t appreciate recent economic strength, says Chadha. As long as that continues, bouts of weakness should remain relatively muted. “Consensus forecasts have underestimated the recent rebound in growth and remain subdued, suggesting positive surprises are likely to continue in the very near term, so we don’t expect a pullback,” he says.

Never mind the unease.

(Source: Barrons Online)

The Markets This Week

Like an English major wading through James Joyce’s Ulysses, the market last week was trying to make sense of overlapping narratives. That didn’t stop it from extending its weekly winning streak.

The Dow Jones Industrial Average breached the 21,000 mark for the first time, gaining 183.95, or 0.9%, to close the week at 21,005.71—its fourth straight weekly gain. The Standard & Poor’s 500 index rose to 2383.12, and the Nasdaq Composite advanced 0.4%, to 5870.75; both have been up for six straight weeks.

Much of the action was compressed into one day. After barely moving last Monday and Tuesday, the Dow surged more than 300 points on Wednesday, its largest one-day point gain since Nov. 7, just before the election that swept Donald Trump into office. That the big gain followed Trump’s speech to Congress Tuesday night wasn’t lost on many observers, who noted its conciliatory tone. “Trump became presidential,” Strategas Research Partners Dan Clifton wrote in a note to clients last week. The market appeared to agree, even if some of the enthusiasm was tamped down by the need for Attorney General Jeff Sessions to recuse himself over his unacknowledged contact with Russia’s ambassador during the presidential campaign.

But it was more than just a speech that got the market’s juices flowing. Barclays strategist Keith Parker points to the slew of economic data that was released in the hours following the address. A survey of Chinese manufacturing activity rose for the eighth month, while a similar measure in the U.S. hits its highest reading in nearly three years. “You have synchronized developed-market and emerging-market growth,” Parker says. “That’s a big driver of the rally.”

Is sentiment getting too frothy? The big gains have prompted strategists to lift their S&P 500 projections, with Bank of America Merrill Lynch taking its target to 2450, from 2350, and Stifel taking its to 2500, from 2400. And then there’s Snap (ticker: SNAP). Its initial public offering went off without a hitch after all, as the stock soared 44% on its first day of trading, from the offering price of $17 to a closing price of $24.48. The move meant that Snap left $1.5 billion on the table, the fourth largest amount ever, according to data from University of Florida finance professor Jay Ritter.

Yet Snap, at this point, remains something of a one-off, as others remain reluctant to go public. And Merrill Lynch’s Sell Side Indicator, a measure of Wall Street’s bullishness, still sits in neutral territory despite hitting its highest level in 16 months, a level that in the past has preceded an average gain of 17% over the following 12 months.

Yes, the market narrative has many strands. But for now, they’re pointing to a happy ending.

(Source: Barrons Online)

The Markets This Week

It may not be chocolate and peanut butter, but a dose of healthy earnings and pro-business comments from President Donald Trump was enough to send the major indexes to all-time highs last week.

It sure didn’t look that way at first, as the market barely moved on Monday, Tuesday, and Wednesday. But Thursday, while meeting with airline executives, Trump promised a “phenomenal” tax plan—and stocks were off to the races. By Friday, the Dow Jones Industrial Average had gained 197.91 points, or 1%, to 20,269.37, the Standard & Poor’s 500 index had risen 0.8%, to 2316.10, and the Nasdaq Composite had climbed 1.2%, to 5734.13.

It’s no secret that the market has reveled in Trump’s pro-business comments, even though he has offered few details, particularly on his tax plan. Don’t expect the market reaction to change, says Mike O’Rourke, chief market strategist at Jones Trading. “It’s a void,” he explains. “Until we have substance and a framework, we will see this kind of reaction to noise.”

But stocks are also reacting to something more fundamental: corporate earnings. Yes, there have been some high-profile disappointments. Gilead Sciences (ticker: GILD) tumbled 8.3% to $66.36 after offering downbeat 2017 sales guidance, while General Motors (GM) dropped 3.2% to $35.17 as investors appear reluctant to believe its forecasts of continued strong profits in 2017. The stronger earnings growth is particularly important because the S&P 500 rose 9.5% last year, despite little-to-no earnings improvement, says Daniel Chung, CEO of asset manager Alger. That meant stocks were rising simply because valuations were climbing.

But if it’s earnings you’re interested in, it might be time to look to Europe. On the surface, that sounds risky, perhaps even ridiculous. Greece was back in the headlines last week after the IMF said the struggling European nation needed more debt relief. That sent Greek bond yields soaring, as investors worried about the possibility of a renewed crisis. Then there’s the potential for chaos from elections in the Netherlands, France, and Germany, which could take a populist turn, akin to that taken by voters in Britain and the U.S.

Yet Merrill Lynch strategist Ronan Carr notes that earnings growth in Europe could be faster than in the U.S. this year and next, after lagging behind by 76 percentage points since 2009. At the same time, the value of the MSCI USA index, relative to the MSCI Europe index, hit its highest level in 40 years. “A strong earnings recovery could be the catalyst to unlock the value potential in Europe,” Carr writes.

To which we can only say: finally.

(Source: Barrons Online)

The Markets This Week

The Dow Jones Industrial Average needed a strong finish on Friday to end the week right back where it had started—above 20,000.

Stocks began the week on the wrong foot, with the Dow dropping 229.65 points on Monday and Tuesday. Whether because the market was reacting to President Donald Trump’s travel ban, as some observers suggested, or earnings disasters from companies like United Parcel Service (ticker: UPS) and Under Armour (UAA), was immaterial—stocks looked headed for their first 1% weekly drop since early November.

And then they weren’t. Trump’s decision on Friday to roll back regulations on banks played a big role in getting the market’s juices flowing, as Goldman Sachs Group (GS) and JPMorgan Chase (JPM) soared 4.6% and 3.1%, respectively. The Dow finished up 186.55 points but close to flat on the week, something that “makes all the sense in the world,” says Greg Woodard, senior analyst at Manning & Napier. “The market is moving on every bit of political news.”

All told, the blue chips finished the week close to where they began, down 22.32 points, or 0.1%, at 20,071.46. The Nasdaq Composite both ticked up 0.1% to 5,666.77.

It wasn’t all due to Trump, of course. On Wednesday, the Federal Reserve elected not to raise interest rates. No surprise there, but it also didn’t signal whether or not it would be raising rates in March.

That decision looked sound after Friday’s release of the January payrolls report, which revealed a large increase in jobs but muted wage growth. That would seem to indicate little inflation pressure, something that could allow the Fed to remain on hold—and buy investors time to see how Trump’s policies play out. “It was very much a wait-and-see message,” says Jason Pride, director of research at Glenmede.

But what are we waiting for? Many investors appear to assume that the next market move will be higher and that they will be able to see the next downturn “coming a mile away,” says Adam Parker, chief U.S. equity strategist at Morgan Stanley. “We are worried there is a potential arrogance in adopting this view.”

He points out that just over a year ago, stocks were still trying to find a bottom following a plunge that left nearly everyone shell-shocked—and that the S&P 500 has gained 20% during the last 12 months. “How can anyone be more bullish now?” Parker asks.

It’s a good question.

(Source: Barrons Online)

The Markets This Week

No one likes making a call and being placed on hold. Unfortunately, that’s exactly where the market is just about now.

This is not what was supposed to happen. The new year began with high hopes, with the bulls expecting the rally that began with Donald J. Trump’s election victory to continue into 2017, while the bears salivated at the opportunity presented by a market that had gotten way ahead of itself. Instead, the market has failed to break up or down. Last week, the Standard & Poor’s 500 index was virtually flat at 2,274.64, while the Dow Jones Industrial Average declined 78.07 points, or 0.4%, to 19,885.73. The Nasdaq Composite bucked the trend by gaining 1% to 5,574.12, a record high.

“It has taken longer than people had hoped” for the market to find direction, says Frank Cappelleri, executive director at Instinet. “It’s frustrating for both sides.”

What made it particularly frustrating was that President-elect Trump had the opportunity to get the market going again, but elected not to. At his press conference last week, Trump covered a lot of ground—everything from the media to manufacturing to the sky-high price of pharmaceuticals. But he didn’t cover the three subjects investors especially wanted to hear about—namely taxes, fiscal policy, and infrastructure. As a result, some of the primary beneficiaries of the Trump trade stalled.

The bright side: While investors might be reluctant to place further bets on the Trump trade, they’ve been more than willing to dive into areas that had lagged. Consumer discretionary and tech stocks, in particular, got a boost, with Facebook (ticker: FB) and Amazon.com (AMZN) gaining 4% and 2.7%, respectively. That suggests investors haven’t given up hope for more market upside, they’re just seeking less elevated opportunities. “Everyone’s looking for value where it resides,” says Todd Lowenstein, director of research at HighMark Capital Management. “That’s a healthy sign.”

(Source: Barrons Online)

The Markets This Week

Multiple attempts were made on Mount Everest over a period of 20-some-odd years before Edmund Hillary and  Tenzing Norgay summited its peak in 1953. Hopefully it won’t take that long for the Dow Jones Industrial Average to reach 20,000.

Last Friday, the Dow came within 0.37 point of reaching that big round number, the closest it has come since Barron’s put the blue-chip benchmark on 20,000-watch on Dec. 10. Lost amid all the will-it-or-won’t-it was the fact that the Standard & Poor’s 500 index and the Nasdaq Composite closed at record highs last week, even as the Dow ultimately fell short.

The Nasdaq Composite climbed 2.6% to 5521.06. The Dow Jones Industrial Average rose 201.20 points, or 1%, to 19,963.80, its second-highest close on record.

Should we worry that the Dow faltered just as it seemed it would finally take 20,000? Probably not, says Sameer Samana, global quantitative strategist at Wells Fargo. The Dow has been making its attempt for only a few weeks, and its failure to break through has come after a 9.2% rally since Nov. 4. If the market stays in a rut, he might get worried. For now, Samana contends it’s “just a matter of time.”

And time appears to be on the market’s side. Even a “disappointing” payrolls report last Friday was unable to derail the stock market’s surge higher. Yes, the U.S. created 156,000 new jobs in December, fewer than the 175,000 predicted by economists. But the headline miss didn’t take into account the upward revisions to previous months, which easily offset the December shortfall. “We’re generating more jobs than there are people to fill them,” says Jonathan Golub, Chief U.S. Market Strategist at RBC. “It just feeds this,” he continues, “this” being the stock market rally, of course.

(Source: Barrons Online)

The Markets This Week

Stocks inched higher this week, but investors are still waiting for the Dow Jones Industrial Average to breach 20,000.

Yes, it almost got there. Last Tuesday, the Dow came within 13 points of that elusive round number, but it finished the week just short at 19,933.81, up 90.40 points, or 0.5%—marking its seventh straight week of gains. The Standard & Poor’s 500 index to 2263.79, while the Nasdaq Composite rose 0.5%, to 5462.69.

It was probably too much to expect fireworks from the Dow this week. With the long Christmas weekend looming, trading all but dried up. On Friday, the Dow traded in a range of just 35.09 points, the smallest since Dec. 30, 2013, and the rest of the week wasn’t much more exciting. On Friday, just 3.98 billion shares traded hands, the lightest volume on a full trading day since Dec. 26, 2014.

It’s also perfectly reasonable—and not just because most of us were looking ahead to the holidays. The Dow has gained nearly 10% since the end of October, more than double its 4.1% rise during the first nine months of the year, spurred in part by Donald J. Trump’s victory in the 2016 U.S. presidential election. The pause “makes some sense given how much the market has run,” says Jason Pride, director of investment strategy at Glenmede. “But 20,000 is a clearable number.”

Eminently so, and don’t be surprised if it happens as early as next week. Historically, the last week of the year has been a nice gift to investors. Since 1928, the S&P 500 has gained 1.14 percentage points during the last five trading days of the year, notes Cornerstone Macro technical analyst Carter Worth, well above the average 0.14-point rise for all five-day periods. “The odds are high” that the last days of the year will “play out well,” he observes. And if they do, we won’t have to wait for 2017 to witness Dow 20,000.

(Source: Barrons Online)

The Markets This Week

For the market last week, it was time for wallflowers to finally join the party.

It wasn’t simply that all three major indexes rallied to new all-time highs, but that the tenor of the rally appeared to have changed, as well. Sure, the Dow Jones Industrial Average gained 586.43 points, or 3.1%, to 19,756.85, leaving the blue-chip benchmark just 243.15 points away from 20,000. The Standard & Poor’s 500 index rose to 2,259.53, and the Nasdaq Composite, which had been trailing for so long, climbed 3.6%, to 5,444.50.

Yet for the first time since Donald J. Trump’s victory in the 2016 election, the split between apparent winners and losers under his presidency began to narrow. Yes, the financial sector continued to top the S&P 500 after gaining 4.8% last week, but technology, which has been bringing up the rear in recent weeks, was a close second after rising 4.2%. And even health care, which tumbled as much as 2.2% on Wednesday after Trump criticized drug pricing, managed to finish the week in positive territory.

“Instead of health care dragging the market down, the market pulled health care along for the ride,” says Instinet’s Frank Cappelleri.

What’s behind the sudden shift? A big, heaping dose of confidence. On Friday, the University of Michigan’s preliminary consumer confidence index for December rose to 98, the highest reading since January 2015, and is nearing its highest level since 2004. And in a report released last week, Bank of America Merrill Lynch economist Michelle Meyer, after perusing the available anecdotal evidence from company earnings calls and other sources, noted that “there is more optimism about the economy following the election.”

If Trump’s tax cuts and spending plans become reality, that could create a virtuous cycle where “the gain in animal spirits could amplify the boost to the economy from fiscal stimulus,” Meyer wrote.

(Source: Barrons Online)

The Markets This Week

Market action during the Thanksgiving-shortened trading week indicated that the postelection rally is no turkey.

Indeed, it has legs. Wings, even.

The Dow Jones Industrial Average and the Standard & Poor’s 500 index rose every day last week, and both were up for the third consecutive week, hitting new records. The Dow jumped 284 points, or 1.5%, to 19152.14. The S&P 500 rose 31 points to 2213.35. The Nasdaq Composite also rose 1.5% to a new record.

The Russell 2000 index, which tracks small-caps, has been on an absolute tear, rising 15.8% in three weeks. On Friday, it clocked a 15-day winning streak.

The market is pricing in a near-certainty of faster gross-domestic-product growth next year, says David Waddell, chief investment strategist at Memphis-based Waddell & Associates. If the current trend is for GDP growth of about 2.8%, “that could go to 4.5% pretty quickly,” he adds. “That’s why there’s so much euphoria. We’ve seen big piles of cash coming into the market. People were so terrified of the election, and now all of that cash is coming back in a hurry. That’s why the market’s not going down, because everybody’s buying every dip now.”

But isn’t that euphoria usually a red flag?

“Do not underestimate the value and amplifier of animal spirits,” Wadell says. “Animal spirits, once unleashed, can be pretty superfantastic economic additives.”

And then, in the style of President-elect Donald J. Trump, he exclaims: “It’s gonna be yuge!”

Despite the rally in the Russell 2000, Waddell continues to like small-cap stocks. Small-cap value names tend to do well during periods of high growth and low taxes, he notes, pointing to the disproportionately large rally among those stocks in the early 1980s. Small-caps benefit the most from tax cuts because they don’t have an army of accountants that can reduce their tax bills.

A cut of six to seven percentage points in corporate tax rates should result in a 10% increase in earnings per share for small-caps, notes Jason Pride, director of investment strategy at Glenmede. And Trump has called for a lot more than that—a decrease in rates to 15% from 35%. “The rally in small-caps is more than justified,” he says.  Waddell’s sense of bullishness is widespread. But not everyone has given up looking for the brake. Jeff Carbone, co-founder of Cornerstone Financial Partners, says the influx of cash at this stage of the rally has begun to make him cautious.

“My fear is people are trying to chase,” he says. “You can see by the inflows that people are starting to think they’re going to miss something.” Sometimes those animal spirits can lead to misconceptions.  Beyond financials, which could benefit from higher interest rates and a rollback in regulations, investors have been making bullish bets on health care, on expectations of changes in regulations and a rollback of Obamacare, and industrials, which could benefit from infrastructure spending.

Tech stocks, which had struggled immediately after the election, rebounded last week. Facebook (FB) rose 2.9% and Amazon.com (AMZN) was up 2.7%. And utilities got a bit of a reprieve after falling since the election; the Utilities Select Sector SPDR ETF (XLU) rose 1.9% on the week.

Precious metals continued to fall, however, belying pre-election expectations that investors would buy gold to hedge against uncertainty. Gold futures dropped 2.5% last week to $1,178.20 per ounce.

The coming week could help determine the path of the market in December. On Friday, the government will release November jobs data, giving investors more clarity on whether the Federal Reserve will be raising interest rates.

(Source: Barrons Online)