Market Maintains Ever-Higher Levels After Six Straight Weeks of Gains

Ho, hum — as the old-time civil servants used to say after punching out their time-clocks at the end of the workday — “another day, another dollar,” and we can certainly apply this expression to what has been taking place in the stock market, as for the sixth week in a row last week, the Dow Jones Industrials, the S&P and the Dow Jones Transportation Index all attained best-ever levels, with only one down day to interrupt the upside march.

And as I have pointed out for the past few weeks now, one of the motivating upside factors has been that third-quarter earnings results for the S&P, which are about to come to end with 465 of the 500 members already reporting, have consistently been raised as the earnings season has progressed. For instance, at the start of the period, the expectation was that final profit growth would show a gain of only 2.2 percent. As more and more companies have beaten the estimates, the final figure has now been raised to a gain of 4.9 percent, with a 2.9 percent advance on the revenue side. Of the companies that have reported, 75 percent have beaten their earnings forecasts, ahead of the traditional 63 percent that usually beat while 53 percent have been ahead on revenues, which is lower than the usual 61 percent that beat on the sales side. As of now, the projection for the fourth quarter is for an earnings advance of 5.8 percent, and this forecast will be subject to what companies say about whether and how the partial federal government shutdown affected them.

In last week’s column, it was mentioned that the market had taken a bit of a downside breather the week before last when two economic releases came in stronger than expectations, namely, the first estimate for third-quarter G.D.P. growth and the October jobs report. This led some market experts to fall back on the old “good news is bad news” syndrome in the sense that if the economy was picking up strength on its own, then the Federal Reserve would push forward the date of the start of its tapering program to as early as next month from what had been thought to be a consensus that the withdrawal of part of the $85 billion-a-month purchases of Treasury and mortgage-backed securities would not start until March.

This idea of an earlier-than-expected start of the tapering process has now been done away with as Janet Yellen, the president’s nominee to replace outgoing Fed Chairman Ben Bernanke, released her prepared testimony last Wednesday evening ahead of her questioning by the Senate Finance Committee on Thursday.

In it, she said that “We have made good progress, but we have farther to go to regain ground lost in the crisis and the recession. Unemployment is down from a peak of 10 percent, but at 7.3 percent in October, it is still too high, reflecting a labor market and economy performing far short of their potential. At the same time, inflation has been running below the Federal Reserve’s goal of 2 percent and is expected to continue to do so for some time.” What got the stock market turned on to the upside once again was her additional comment that “For these reasons, the Federal Reserve is using its monetary policy tools to promote a more robust recovery. A strong recovery will ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases. I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy.”

To these dovish comments that basically told the world that the Fed is not about to push the tapering button anytime soon, she added the following comment to a question from the committee: “It is important not to remove support, especially when the recovery is fragile and the tools available to monetary policy, should the economy falter, are limited given that short-term interest rates are at zero.” Well, these words were all that an already bullish market needed to hear, as gains accelerated as the day moved along on both Thursday and Friday, with the major averages closing at their best levels of the session and the Nasdaq joined the upside party with its highest close since September 2000, when it was on the way down from its all-time high reached in March of that year.

Friday’s closes put the three major averages very close to some nice round numbers at Dow 16000, S&P 1800 and Nasdaq 4000 and on Monday they tried to establish new beachheads above these levels, as the Dow started the session with a push to 16030, the S&P got as high as 1802 and the Nasdaq reached 3995. But after maintaining these gains for most of the session, the air at these levels perhaps got a little thin and for no other reason than sheer exhaustion after such a long journey upward, things faded in the afternoon with only the Dow able to end the session higher with a nominal gain up to 15,976.

The late selloff was attributed to comments from New York Fed President William Dudley who seemed to speak out of both corners of his mouth by saying that “Monetary policy is likely to be accommodative for some time” but at the same time he is getting more “hopeful” that the economy is gaining strength as the drag from fiscal policy wanes. Then we had the large activist investor who for the past several weeks has been carrying on about the shares of AAPL being “grossly undervalued” (of course he owns a very large position in them), and now saying that he would be “very cautious” about equities. These remarks were also pointed to as an “explanation” for why things weakened into the close.

The market still appears to be locked into its historical tendency since 1928 (the year that the S&P began), to rally in the last two months of the year 82 percent of the time when the S&P has already advanced by at least 10 percent through October, which it has certainly done this year in spades with a year-to-date gain of 26 percent. This has been its best performance since the 2009 recovery off the 2008 disastrous market low.


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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