Major Averages Reach New All-Time Highs on Strong Economic Reports

The Dow and S&P continued their latest winning streaks, advancing for five straight weeks; in the process they both attained new all-time-high levels. The Dow reached its best price ever on Monday at 15,783 while the S&P ended just below its best-ever level reached last Tuesday at 1771.95 with a close at 1771.89 to start the week. In the process, they both managed to keep the 2013 uptrend alive after taking a major downside beating last Thursday.

And that big selloff was a classic example of the old “good news is bad news” syndrome, as it was reported that the first estimate for third-quarter GDP growth showed a gain of 2.8 percent, which was higher than the expert consensus of a slowdown to only 2 percent. This stronger than expected number supposedly showed that the economy was gaining on its own accord and therefore meant that the Federal Reserve could start the tapering of its current $85 billion a month stimulus package sooner rather than later. In other words, after some weaker reports last month convinced the experts that the tapering would be pushed back into March 2014, now the thinking was that the central bank could begin the process as soon as next month.

But there were more nuances to the numbers than first meet the eye, because even though the estimate was for a gain of 2 percent, higher inventories accounted for .83 percent of the number and this will be taken back in the fourth quarter as these inventories are worked off. On the other hand, consumer spending, which makes up 75 percent of the economy, expanded at its slowest level in two years at a gain of 1.5 percent versus 1.8 percent during the second quarter. Business spending also slowed sharply, primarily due to a cooling off on outlays for equipment. So one could argue that this was not a particularly strong report that would have justified the thinking that now the Fed was going to push forward the start of its tapering program into December.

As a result of this anxiety about what the Fed’s intentions were, on the day of the release of this report, namely last Thursday, the S&P underwent its worst one-day decline since August 27 and in the process it fell to a two-week low while the Nasdaq, weighed down lately by poor performances from its contingent of high-fliers such as FB, NFLX and TSLA, among others, fell to its worst level in three weeks.

The second major release that I said in last week’s column would be discussed this week was the always important monthly jobs report for October last Friday. And in another surprise that caught the supposed experts off guard once again, the gain in payrolls last month was reported at a large 204,000, well above the 125,000 consensus that had been floating around. In addition, 60,000 more jobs were added in August and September than had been originally estimated.

But at the same time, the unemployment rate rose from 7.2 percent up to 7.3 percent. October’s jobs gains pushed them above the 190,000 monthly average for the past 12 months, which can be construed as a sign of labor market strength. On the other hand, the report also showed that a surprisingly large number of Americans dropped out of the labor force, pushing the participation rate down to 62.8 percent, the lowest since March 1978.

What really threw off the calculations was that the government workers furloughed during the partial federal shutdown were counted as unemployed in the smaller household survey but were considered to be on the payroll because they did receive back wages. As far as sectors were concerned, the leisure and hospitality industry added 53,000 new jobs, the most since April, professional and business services added 44,000 and the retail sector added 44,000 as well. Manufacturing rose by 19,000, the most since February, and construction advanced by 11,000.

Based on the market’s negative reaction to the better GDP report as mentioned above, one would have thought that the same “good news is bad news” way of thinking would carry last Friday as well. But despite a preliminary U. of Michigan Consumer Sentiment Survey that declined for the fourth straight month to a two-year low, after a hesitant start, things exploded to the upside once again as the Dow advanced by 166 points to a new record high, which was broken on Monday as described earlier. The Nasdaq redeemed itself after last Thursday’s downside disaster with its best showing in a month while the S&P had its best day in three weeks.

At the same time that stocks were once again surging to the upside, bond yields also rose on the consensus thinking that tapering is coming sooner rather than later, as the 10-year Treasury note made its largest one-day upward adjustment in four months to 2.75 percent. The dollar strengthened as the Euro declined to its lowest level in two months down to 1.34 on the higher rates here and the lower ones in the EU after the ECB pushed down its benchmark rate to the smallest ever, at .25 percent. Gold also took a downside beating on the dollar strength as it fell to its lowest level in three weeks at $1,282 an ounce.

The stock market’s powerful upside move despite another strong economic report showed that investors now believe that the economy has enough upward momentum of its own to withstand any potential stimulus tapering next month, but at the same time it should be pointed out that this is not a done deal by any means.

Now that third-quarter earnings are just about over, the results have continued to come in better than consensus, with profit gains now projected to be for a final advance of 4.7 percent and for revenues to be ahead by 2.9 percent. Readers should take note of the fact that these earnings gains have been moving consistently higher as we have gone through the earnings period, as when companies started reporting several weeks ago, the projection was for a profit increase of only 2.2 percent and this steady moving up of the number, so to speak, has been one of the factors supporting the ongoing gains that the market has been seeing. As of now, estimates are for fourth-quarter earnings to show a 6.2 percent increase.

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.

This article appeared in print on page 43 of the November 13th, 2013 edition of Hamodia.