After a brief respite two weeks ago, the market once again pushed to new all-time best-ever levels last week, as the Dow reached a record for the 30th time this year, the S&P attained its highest price ever for the 25th time and the Russell 2000 Index of small stocks got to its pinnacle for the 47th time in 2013 before they all cooled off slightly on Monday.
It seemed as if the market was so determined to go higher that it used the old “good news is good news” syndrome to reach record highs last Thursday and then put in an encore performance the next day with the “bad news is good news” syndrome despite a very mediocre jobs report, by attaining new record highs to end the week.
After ending the month of July on Wednesday with a slight decline, which by the way was the market’s fifth lower close out of seven on the last day of a month this year despite the major averages being higher by 20 percent in 2013, things took off with a vengeance once again on Thursday, the first day of the new month. And by the way, this marked the sixth time that the major averages ended higher out of eight first days of the month this year, which is certainly a dramatic contrast to how they tend to finish any given month.
Despite the lower close on Wednesday, July 31, July was a superb month for investors, as the Dow ended with a 4 percent gain, the S&P was ahead by 5 percent for its best monthly showing since January, the Nasdaq ended with a 6.3 percent advance while the Russell 2000 Index was the champ with a 6.8 percent gain.
As was mentioned earlier, August saw the Dow begin the new month with a triple-digit gain as a result of weekly jobless claims declining to their lowest level since January 2008 in addition to the July ISM Manufacturing Survey rising to its highest level in more than two years. This was a classic example of the stock market doing well on the perception of a stronger economy, a perfect illustration of “good news is good news.”
On Friday, the market hesitated at first after a disappointing July non-farm payroll report but managed to end the session at further new all-time highs, which ultimately proved to be a perfect example of “bad news is good news” also. With official estimates from various experts in the 185,000 to 200,000 range, the Labor Department announced that only 162,000 new positions were created last month.
This was the smallest gain in four months and at the same time the unemployment rate declined to 7.4 percent, the lowest since December 2008, but this was purely the result of fewer people in the workforce. In addition, there was a downward revision of 26,000 jobs in the prior two months as well. Average hourly earnings declined as did the length of the workweek. The largest gain came from retail jobs, the biggest increase in eight months. Education and health service jobs showed the smallest gain in a year, construction jobs declined but manufacturing jobs rose for the first time in five months.
But never mind, the Dow turned an initial knee-jerk reaction of being lower by 70 points into an eventual 30 point closing gain, which meant that it made an intraday reversal higher of 100 points, all on the same data, which just goes to show how powerful this market has been.
Interestingly, bond yields rose on Thursday after the stronger data led investors to believe that the economy was strengthening, with the yield on the all-important 10-year Treasury note up to 2.72 percent. And sure enough on Friday, these yields declined right back down to 2.62 percent on the assumption that perhaps the economy is not as strong as investors thought it was just the day before!
Helping to lower bond yields on Friday, and perhaps helping to push stocks higher as well, was a comment from the dovish St. Louis Fed President that the central bank should wait for improvement in both the labor market and the economy before undergoing any tapering of the $85-billion-a-month stimulus programs currently in effect.
On Monday things cooled off a bit as another regional Fed President, this time from Dallas, who is known for his hawkish views on monetary policy, stuck in his two cents with comments to the effect that the Fed is closer to tapering some of the current stimulus and he also added that “financial markets may have become too accustomed to the idea that the central bank will loosen credit after a market decline.” By this he meant that some investors “have come to expect the Fed to keep the markets levitating indefinitely and this can distort the pricing of financial assets and can lead to serious misallocation of capital.”
Second-quarter earnings continue along, as with now 393 of the S&P companies having reported, the results have been for a profit gain of 4.7 percent with revenue growth showing only a 1.6 percent advance. Seventy percent of the companies have beaten their earnings estimates while only 56 percent have beaten on the revenue side, but let it also be remembered that the average beat rate on the latter for the past four quarters has been 48 percent, so this number is not as terrible as it sounds. As of now, the consensus is for a 5.5 percent profit gain in the third-quarter followed by a spurt to an 8.8 percent advance in the final three months of the year.
One can argue that the market is indeed overbought and in need of some sort of rest to allow investors to take profits at higher prices and also to allow new investors to enter at lower levels. As an example of how overbought things have become, 83 percent of S&P stocks are trading above their 50-day moving average, and this compares to only 13 percent that were above this benchmark after the 5.8 percent Fed-induced downward correction from what were then the May 21 highs to the June 24 lows. In addition, 115 S&P stocks have a relative strength reading over 70, and this is the highest since May 21, which means that perhaps some sort of selloff might be in the works.
Donald Selkin is the Chief Market Strategist at National Securities in New York, a veteran in the securities industry for 36 years who is widely quoted in the financial media.
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