If one thinks that the current market upside was getting a bit too expected in last week’s column — guess what? This week’s column saw more of the same as, for the seventh straight week, the major averages advanced again as the Dow Jones Industrials, the S&P, the Russell 2000 Index of small stocks, the mid-cap indexes and the Dow Jones Transports all made further all-time highs.
And for what it is worth, in the process both the Dow and S&P were able to close above the nice round numbers of 16,000 and 1,800 respectively while the Nasdaq traded but did not close above 4,000. This was its highest level since September 2000 when it was on the way down from its all-time high of 5,000 reached in March of that year.
This has been the longest such weekly winning streak since the major averages gained for eight weeks in a row during the December 2010 to January 2011 period and it also means that the S&P could be on track for its largest yearly advance since 1998, with a gain of over 26 percent so far in 2013.
In addition to third-quarter earnings coming in better than what they were expected to be at the start of the reporting period in early October, at a final profit advance of 4.9 percent versus the original consensus of 2.2 percent, there have been other supportive factors such as the $172 billion taken in by equity mutual funds through October, the largest amount since $272 billion for all of 2000. This has resulted in more stocks that are higher this year in the S&P than in any other year since 1980; 221 members are ahead by 30 percent or more.
The fact that profits are projected to have advanced this year by only 8 percent from 2012 and the S&P is ahead by 26 percent means that there has to be some other significant factor at work, and that factor has to be the record amount of stimulus that the Federal Reserve has pumped into the economy to the tune of $85 billion a month through purchases of long-term Treasury bonds and mortgage-backed securities. This has kept interest rates at all-time record lows and has forced investors seeking better returns into risk assets such as stocks.
And this past week we saw investors react both negatively and ultimately positively to any word from the Fed as to what their future intentions are in terms of one of these days actually beginning to start the tapering process away from this largesse. For instance, last Tuesday Fed Chairman Bernanke said that the central bank will maintain ultra-easy monetary policy for as long as needed, which could mean holding interest rates near zero until “well after” the unemployment rate declines below 6.5 percent from its current 7.3 percent level. He added that even though the economy had made significant progress, it was still far from where officials wanted it to be. “The F.O.M.C. remains committed to maintaining highly accommodative policies for as long as they are needed,” he remarked and added that “the committee still expects that labor market conditions will continue to improve and that inflation will move toward the 2 percent objective over the medium term.” If these views are supported by incoming data, the central bank will likely begin to moderate the pace of purchases, he concluded.
The next Fed meeting will take place on December 18, although the current consensus is that any sort of tapering will not occur until either the January or March 2014 meeting. The Fed has promised to hold rates near zero until unemployment reaches 6.5 percent provided that the rate of inflation stays under 2.5 percent, which it currently is.
As an example of how skittish the market is relative to the start of any sort of tapering program, last Wednesday saw stocks decline for the third day in a row before regaining their composure at the end of the week and Monday and reaching those best-ever levels as mentioned above. What set things off to the downside was the release of the minutes of the October Fed meeting, in which they said that they might reduce their $85 billion in monthly bond purchases “in coming months” as the economy improves.
Policy makers “generally expected that the data would prove consistent with the committee’s outlook for ongoing improvement in labor market conditions and would thus warrant trimming the pace of purchases in coming months,” their statement read. Of course this statement is as innocuous as can be, but so on edge are investors as to when the Fed might begin the tapering process that the Dow declined to an intraday triple-digit loss of more than 100 points before recovering a portion of it by the close. Then after a calmer realization that nothing has changed in terms of their thinking, the market rallied to new all-time highs on both Thursday and Friday before making further new slightly higher levels to begin the week.
These gains got an additional push from news that an interim nuclear deal between Iran and the major powers had been reached over the weekend. It would freeze key aspects of Iran’s nuclear program for six months and lay the groundwork for negotiating a comprehensive permanent deal. The deal buys time to work on a longer-term solution that constrains Iran’s nuclear program and guarantees that it is put to peaceful use. Iran has agreed to stop enriching uranium beyond 5 percent, a level sufficient for energy production but not bomb-making and will dismantle links between networks of centrifuges.
The news caused oil prices to decline as this curtailment of their nuclear activities in return for the easing of some sanctions on oil, auto parts, gold and precious metals caused the prices of energy products and metals to decline due to the perception of increased supplies. Oil prices have been in a major downtrend for the past several weeks in any event, due to record production in this country and lower demand, which has increased inventories here to their highest levels in months. This could be major good news for consumers ahead of the shopping season that is now upon us and since consumer spending makes up 70 percent of the economy, this might lead to better fourth-quarter G.D.P. numbers, another supporting upside factor for stocks.
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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