The stock market finished little changed last week in quiet summer trading. August doldrums were punctuated briefly by all-time highs set on Thursday, though prices retreated slightly on Friday.

Soft U.S. retail sales and consumer sentiment data out on Friday dampened investor enthusiasm. Interest-rate hike expectations eased, which led to a 1% drop in financial stocks on the week.

All three major U.S. indexes hit highs simultaneously on Thursday, the first time that has happened since Dec. 31, 1999, during the dot-com boom. (The Nasdaq did it again on Friday.) That era seems a long time ago in a galaxy far away. Today’s market continues to rally despite finding little support among institutional investors and facing downright skepticism in many quarters. Perhaps that’s where the bull’s strength lies.

The Dow Jones Industrial Average rose 33 points, or 0.2%, last week, to 18,576.47, below the record high of 18,613.52. The Standard & Poor’s 500 index inched up by one point to 2184.05, just below its high of 2185.79. The Nasdaq Composite gained 0.2%, to 5232.89, another new high.

Investors live in a world of low corporate profit growth and low bond yields, notes Douglas Cote, chief market strategist at Voya Investment Management. That’s conducive to making an already pricey market—the S&P 500’s price/earnings ratio is 18.5 times 2016’s earnings—more expensive.

The desperate search for yield continues, as evidenced by the better-than-18% returns this year in ho-hum sectors like telecom and utilities. Consequently, says Cote, the market shouldn’t be measured against its own historical average P/E, about 15 times, which suggests it is expensive. Instead, it should be compared to bonds and other alternatives. With the Treasury’s 10-year note yielding 1.5%—near lows not seen before in modern history—there’s no alternative to stocks for investors who want returns.

The more stocks go up, the more those sitting on the sidelines will be forced to capitulate and join in, Cote contends. Thus, he maintains, the market can continue to get more expensive in the context of such low bond yields.

In a way, this market—though much less expensive than it was in the dot-com era, when its P/E hit 28—has something in common with that old bull. In those days, there was an emotional euphoria about powerful profit-growth expectations, driven by then-new Internet stocks. Today, another emotion—a desperation for yield—mirrors that euphoria. In 1999, the market reached its 28 P/E when bonds were yielding about 6.5%—yes, you read that right.

(Source: Barrons Online)

After weeks of slumber, the market sprang awake Friday, jolted by a much better than expected July employment report. The Standard & Poor’s 500 rose 0.9% on the day, and closed at a new high.

For the week, The Dow Jones Industrial Average rose 111 points, or 0.6%, to 18,543.53, while the S&P 500 index increased nine points to 2182.87. The Nasdaq Composite jumped 59 points, or 1.1%, to 5221.12, also a new record. After lagging earlier in the year, the Nasdaq has risen about twice as fast as the Dow and S&P in the past month, as technology stocks have outperformed.

U.S. employers added 255,000 jobs in July, and the government revised upward June’s tally to 292,000. None of the 89 economists surveyed by Bloomberg before the report had expected such robust growth. Even groups formerly left behind during the economic recovery—like people without high school diplomas—saw gains during the month. The unemployment rate stayed steady at 4.9% as the labor force grew by more than 400,000. Wages ticked up by 0.3 percentage points, and have risen 2.6% in the past year, the most since 2009.

The strong gains should quell some concerns about the recent muted growth of the economy. Last week, the Commerce Department estimated that GDP grew 1.2% in the second quarter, a much weaker number than expected.

“Everyone was waiting for this employment report to see if it confirmed the weakness in the GDP number,” said Keith Lerner, chief market strategist at SunTrust. “It didn’t, and people had a sense of relief.”

The Atlanta Fed releases an up-to-the-minute forecast for GDP. It predicted Friday that third-quarter GDP could rise 3.8%.

The improving jobs market makes it more likely the Fed will raise interest rates, possibly as soon as September. After the report, futures markets indicated that the chance of a September hike had risen to 26% from 18%.

Cyclical sectors led the market higher; defensive, bond-like companies generally lagged. Financials jumped 1.9% Friday; tech rose 1.2%, and consumer discretionary stocks, 1.1%. But utilities dropped 1.4%, and telecom, 0.2%. Gold futures also fell Friday, by $22.40 an ounce, or 1.6%, to $1,336.40.

For much of the year, gold has risen and utilities and telecom stocks have led the market, as they offer large dividend yields and less risk from an economic contraction. With the market shifting, new sectors are leading the indexes now. Tech and health-care companies have shown particular strength in this earnings season, with more than 80% of companies in each sector reporting better-than-expected earnings.

Investors haven’t jumped in with both feet yet, however. While the market hasn’t had a recent correction, trading has been cautious. Stocks traded in a tight range in the second half of July, a pattern Lerner thinks gave investors a healthy breather. Surveys show investors remain particularly cautious, indicating that the recent move higher isn’t a burst of irrational exuberance.

Investors have pulled $70 billion from equity funds this year so far, while pumping $137 billion into bond funds, according to the Investment Company Institute. A BofA Merrill Lynch survey last month showed investors are stockpiling more cash than they have in 15 years. “Normally at tops in the market you have excessive optimism,” Lerner said. “You’re not seeing that.”

(Source: Barrons Online)