Most
of the time the U.S. stock market looks to 3 factors (call them the “pillars”
that support the stock market) to support its upward trend – let’s grade each
of the pillars.
CONSUMER SPENDING: I grade this factor a C (neutral). This is under review for possible upgrade
depending upon the evaluating the results of the Holiday season retail
spending.
THE FED AND ITS POLICIES: I continue to grade this factor an A+ (extremely favorable) because the
FED cannot do much more than it is doing to support the stock market and asset
prices. 10 days ago, the FED finessed
the markets by carefully wording its press release announcing the taper of its
quantitative easing program – more good news!
BUSINESS PROFITABILITY: I continue to grade this factor an A (very favorable).
NOTE: the above grades are unchanged from last
week.
Though many Wall Street participants took a holiday
hiatus, stocks still managed a string of record closes and a win last week.
Prices eased slightly on Friday, but the major indexes gained over 1% in a short
trading week.
Prior to Friday, the stock market had closed at
all-time highs for six consecutive sessions. There were few players on the
scene, low volumes, little in the way of economic data, and corporate news flow
was light, but “stocks are acting like they are in a race to the finish
line,” says Fred Dickson, chief investment strategist at D.A. Davidson.
“It was a textbook Santa Claus rally week.”
The Dow Jones Industrial Average advanced 1.6% or
257 points, to 16,478.41. Friday, the average eased slightly, but it remains up
26% on the year. The Standard & Poor’s 500 index rose 1.3% or 23 points to
1841.40. The Nasdaq Composite index picked up 1.3% or 52 points, to 4156.59.
To some extent last week, economic sentiment might
have been boosted by what’s turning out to be a good Christmas retail season,
says Douglas Coté, Chief Market Strategist at ING U.S. Investment Management.
There was heavy media coverage of overwhelmed package-delivery companies, a
“problem” that suggests the economy is busy, Coté says. Additionally,
the stock market seemed to take in stride the move in the 10-year Treasury bond
yield over the psychologically important 3% level, he adds.
The market’s fourth-quarter “gangbusters”
10% rise is capping off a powerful year that could potentially draw back
individual investors, who have missed most of the rally from 2009 lows, Coté
says. Expectations that stock prices will rise over the next six months jumped
7.6 percentage points to 55.1%, the highest in three years, according to the American
Association of Individual Investors’ latest survey.
From a technical point of view, says Dickson, the
rally looks stretched, based on a number of metrics. The thrust has been big
and quick and “usually what happens is a pause or small pullback short
term,” he says, after this kind of move (Source: Barrons Online).
Most
of the time the U.S. stock market looks to 3 factors (call them the “pillars”
that support the stock market) to support its upward trend – let’s grade each
of the pillars.
CONSUMER SPENDING: I grade this factor a C (neutral).
THE FED AND ITS POLICIES: I continue to grade this factor an A+ (extremely favorable) because the
FED cannot do much more than it is doing to support the stock market and asset
prices.
BUSINESS PROFITABILITY: I continue to grade this factor an A (very favorable).
NOTE: the above grades are unchanged from last
week.
Good news was once again actually regarded as good
news—at least for a day.
Friday, stocks jumped sharply, bolstered by positive
economic data. That took the market from a week headed for a sharp loss to one
that finished mixed.
In previous weeks, a perverse logic—still in
evidence as late as Thursday—had gripped investors, with the market sometimes
sliding on occasional news of strong economic figures. Investors fear that such
data will push the Federal Reserve to begin its intended removal of its
bond-buying sooner rather than later. That easy-money policy has helped pushed
stocks to record highs this year.
Most investors appear to believe the Fed will begin
the taper in the first quarter and not at the coming Federal Open Market
Committee meeting Dec. 17-18, but there’s a residual fear of that.
After eight consecutive weekly gains, the Dow Jones
Industrial Average fell 0.4% or 66 points to 16,020.20. The Standard &
Poor’s 500 lost less than 1 point. The
Nasdaq Composite Index rose slightly, 0.1% or three points, to 4062.52.
The data last
week collectively showed one of the strongest economic pictures in some time.
The gamut of figures—jobs, manufacturing, consumer sentiment, gross domestic
product—all suggested a modestly accelerating U.S. economy.
The switch in the market’s reaction to the good news
suggests it previously was more concerned about the economy than the Fed
tapering, says Malcolm Pulley, president of Stewart Capital Advisors. In other
words, investors feared the stimulus reduction would begin when the economy
wasn’t ready. But the slew of solid data was strong enough to get investors
thinking it is.
Friday, the Labor Department said payrolls rose by
203,000 jobs in November, and the unemployment rate fell to 7%, the lowest in
five years. The consensus, respectively, was for 185,000 jobs and a 7.2%
jobless rate. Thursday, the third-quarter annualized GDP was revised up to a
solid 3.6% from 2.8%, and well above the 3.1% consensus.
Much of that GDP rise was due to rising inventories,
points out Pulley, and if those inventories aren’t bought up in the first
quarter, the market could be disappointed.
As for tapering,
Marc Pado, president of DowBull, an investment advisor, says Friday’s reaction
also means the market is getting both more comfortable and certain of the
coming tapering. The economy looks to be getting “a little bit of
traction…and a March taper is pretty certain now,” he adds.
The market strategist adds that while some think a
December move is still possible, the Fed will want to give Janet Yellen, set to
succeed Chairman Ben Bernanke on Feb. 1, time to settle in without the strum
and daring that a December tapering could elicit.
Indeed, the only thing that could prevent a strong
second half of December is a surprise tapering by the Fed next week (Source: Barrons Online).
Most
of the time the U.S. stock market looks to 3 factors (call them the “pillars”
that support the stock market) to support its upward trend – let’s grade each
of the pillars.
CONSUMER SPENDING: I grade this factor a C (neutral).
THE FED AND ITS POLICIES: I continue to grade this factor an A+ (extremely favorable) because the
FED cannot do much more than it is doing to support the stock market and asset
prices.
BUSINESS PROFITABILITY: I continue to grade this factor an A (very favorable).
NOTE: the above grades are unchanged from last
week.
How else can yet another all-time market high be
explained in a week lacking any obvious catalyst beyond the start last Thursday
of the holiday season, a traditionally auspicious time for equities.
Though prices
closed off highs, stocks rose 0.1% in a shortened trading week. Many pros are
looking—maybe hoping—for a sizable stock-market pullback before year end, even
a minor one, but that’s increasingly looking like a low-probability event
against the powerful upward inertia seen all year. Apart from those few
investors who remain short, few will find lumps of coal from Santa this year.
In the eighth-straight week of gains, the Dow Jones
Industrial Average rose 22 points, or 0.1%, to 16,086.41. The Standard &
Poor’s 500 index rose one point, to 1,805.81, down slightly from Wednesday’s
record close of 1,807.23. The Nasdaq
Composite index picked up 68 points, or 1.7%, to 4,059.89.
It’s hard to see anything other than seasonal bias
and inertia behind the latest rise, says Mark Luschini, chief investment
strategist at Janney Montgomery Scott. The market has defied the ubiquitous
correction warnings, “forcing investors to commit long for fear of being
trampled” by the well-known holiday predilection, he adds (Source: Barrons Online).
The S&P 500 Index of U.S. Stocks has increased over 20% so far this year. Since 1991 the S&P 500 has gained 20 percent or more, excluding dividends, in a year 7 times, every instance saw a higher market 1 year later. Source: The Big Picture.
Most of the time the U.S. stock market
looks to 3 factors (call them the “pillars” that support the stock market) to
support its upward trend – let’s grade each of the pillars.
CONSUMER
SPENDING: I grade this factor a C (neutral).
THE
FED AND ITS POLICIES: I continue to grade this factor an A+ (extremely favorable) because the
FED cannot do much more than it is doing to support the stock market and asset
prices.
BUSINESS
PROFITABILITY: I continue to grade this factor an A (very favorable).
NOTE:
the above grades are unchanged from last week.
With Thanksgiving and the holiday season upon us, investors are
getting comfortable. Who’s afraid of the tapering wolf? Fewer investors than
before, if last week’s equity and bond action is anything to go by.
Stock prices
finished higher for a seventh consecutive week, and the major U.S. indexes
closed at—you guessed it—record highs. Equity prices rose 0.4%, but that
includes a recovery from a nearly 1% drop at one point midweek, following
Wednesday’s release of the minutes from the October Federal Open Markets
Committee meeting.
The Fed
reiterated that economic trends would warrant a reduction in stimulus “in
coming months.” The central bank’s $85 billion monthly bond-buying program
has kept interest rates low and fueled the stock-market rally.
Both stock and
bond prices fell sharply after the release of the minutes Wednesday.
Nevertheless, by Friday’s close, equities had recovered all the ground and then
some. Meanwhile, Treasury bond prices also rose from Wednesday’s lows, though
they still fell on the week.
The Fed’s
tapering hints earlier this year elicited much worse reactions, notes Rick
Fier, a trader at Conifer Securities in New York. Wednesday, the bond market
spiked down, but the reaction was “short-lived and that suggests the
market is getting comfortable with the taper,” he says.
Michael Matousek,
head trader at U.S. Global Investors, concurs. “The big money would sell
bonds down hard if they got the idea that tapering is coming [soon].” The
bond recovery in the latter half of the week shows that “no one is in a
rush to sell bonds.”
On the week, the
Dow Jones Industrial Average gained about 0.6%, or 103 points, to 16,064.77 and
the Standard & Poor’s 500 index rose7 points to 1804.76. Both were new
highs. The Nasdaq Composite index added 0.1%, or 6, to 3991.65.
Investor
comfort—or complacency, say the bears—derives from an increasing belief that
tapering is off the table for the short time remaining in 2013, despite one
more FOMC meeting next month. And given that the holiday season is historically
an up period for equities, at this point investors might be more worried about
shopping for gifts than what stocks will do.
Matousek is
betting on tapering to begin in January 2014, and that the market’s upward
momentum will continue until then. It’s hard to see, he adds, the Fed tapering
the stimulus by the end of the year for a couple of reasons. Though U.S.
economic data remain generally positive, there’s no big number to hang the
stimulus reduction on. Perhaps more importantly, Fed Chair Ben Bernanke will
want a smooth transition to his expected successor, Janet Yellen, who, when
approved by Congress, would take over Feb. 1.
If the market is
getting inoculated, by the time tapering begins, will anyone care? (Source: Barrons Online).
Most
of the time the U.S. stock market looks to 3 factors (call them the “pillars”
that support the stock market) to support its upward trend – let’s grade each
of the pillars.
CONSUMER SPENDING: I grade this factor a C (neutral).
THE FED AND ITS POLICIES: I continue to grade this factor an A+ (extremely favorable) because the
FED cannot do much more than it is doing to support the stock market and asset
prices. And, the FED announced on
9/18/2013 it intends to continue the highly accommodative policy to stimulate
the economy.
BUSINESS PROFITABILITY: I continue to grade this factor an A (very favorable).
NOTE: the above grades are unchanged from last
week.
