Last week saw a continuation of the most recent stock market rally that began in early February after equities underwent a 5.8 percent decline off their 2013 year-ending all-time highs. This decline exactly matched the drop in the S&P that investors experienced from late May to late June of last year when then-Federal Reserve Chairman Ben Bernanke first threw out the trial balloon about the start of tapering the $85 billion a month in bond-buying stimulus that had been in effect at that time.
After the February 3 market debacle, which was the worst one-day showing since June 2013, stocks have now advanced for the second straight week and have erased almost their entire losses for the year as the S&P closed on Friday, the day before the Presidents’ Day holiday this past Monday, at 1838, only 10 points away from its best-ever level of 1848.
The Nasdaq and the mid-cap indexes are now fractionally higher for 2014. It is as if all the ostensible headwinds that greeted investors in the early part of the year have been forgotten. Who now mentions the economic slowdown in China and the names of all these exotic emerging-market currencies such as the Turkish lira, Argentine peso, Russian ruble, Indian rupee, South African rand and — let us not forget — the all-important Ukrainian hryvnia.
As a result of these recent market advances, the major averages have now achieved their first two consecutive-week gains of the year, and last week was the best weekly performance since December. And after having declined by 5.8 percent, the S&P has now regained 5.6 percent to be lower by only the amount just mentioned.
What motivated equities higher last week were better-than-expected fourth-quarter earnings and reassuring policy pronouncements from new Fed Chairman Janet Yellen in her testimony to the House Financial Services Committee last Tuesday.
So what did she say that got investors all turned on to the upside? To me, it was more of the same old, same old that has been in effect for the longest time now, but perhaps a familiar message coming from a new voice is what got the market going. She made it clear that the Fed was on track to keep the tapering program in effect even though the labor market recovery was “far from complete.” Mrs. Yellen added that economic growth has strengthened and there is “broad improvement” in the labor market and repeated the Fed’s outlook for further tapering reductions in “measured steps” and that the QE stimulus programs themselves are not on a “pre-set course.”
Why this was so bullish is beyond me, but I assume that the market liked the fact that she created a sense of stability and did not put forth any new ideas other than what the market had already expected. Let us also remember that despite the recent large gains in stocks, both the Dow and the S&P are still lower for the year. And what might have helped in this regard is that she did mention that stock prices were not at “worrisome levels,” even after 2013’s historic surge.
Equities might also have been helped by the fact that Republicans in the House of Representatives agreed to extend the debt ceiling raise all the way out to March, 2015 as Speaker Boehner threw in the towel when he said that the G.O.P. would approve the so-called “clean” debt limit by “putting in a minimum number of votes to get it passed,” thanks a lot.
What was also interesting is that unlike earlier in the year when a very weak January ISM Manufacturing Survey, which fell to the lowest level in eight months and showed the largest decline in 33 years, rocked the market to the downside, three recent weaker-than-expected economic reports have now been “excused” because of the miserable weather that has affected many parts of the country in 2014.
These reports were: 1) the January non-farm payrolls number, which was discussed in detail in last week’s column and which came in well below the consensus forecast; 2) January advance retail sales, which declined by the most since June 2012 and the December number was revised to show a decline from an originally reported advance; 3) January industrial production, which fell by the most since May 2009. So now the “spin” among market experts is that investors have to wait until the release of various economic reports for March and April to get a “true” read on how the economy is doing because it is a given that the February numbers are going to be awful as well, given the unrelentingly poor weather that most of the country experienced in the first half of the month, and this is certainly going to have a negative effect on airlines, travel, construction and retail sales once again.
And the markets can take comfort in Chairman Yellen’s promise that stimulus programs and their reduction are not on any sort of “pre-set” course as mentioned above. This means that if the economy has indeed been adversely affected by poor weather, the Fed can certainly pare back its current plans to taper the stimulus program to less than the current rate of $10 billion a month, or temporarily halt the reductions as well.
The fourth-quarter earnings season continues to push toward the home stretch with around 400 of the 500 S&P companies having reported their results and the scorecard reads as follows: 68 percent of them have beaten their profit estimates against the traditional 63 percent that surpass the projections while 66 percent have beaten on revenues versus the 61 percent that usually surpass in this area. At the present time, it is estimated that when all is said and done, earnings will have risen by 8.3 percent, better than the 5.5 percent estimate at the start of the reporting period while revenues are expected to have gained by 2.7 percent. There is now an initial estimate for the first quarter of 2014 to show an earnings advance of 4 percent which will accelerate to double-digits by the end of the year.
One highlight of this earnings season is the achieving of new all-time record-high prices in what has to be considered the new wave of technology companies such as FB, GOOG, NFLX, PCLN, TRIP and TSLA.
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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