Market action this past week, where the S&P 500, the Russell 2000 Index of small stocks, the S&P Mid-Cap 400 Index and the Dow Jones Transportation Average all made new best-ever highs, once again justified the point that I made in last week’s column, namely that since the start of the bull market five years ago, stocks have been able to overcome so-called “crises” of all sorts. In chronological order they have been: the threat of Greece leaving the E.U., the Japanese earthquake and tsunami, the first-ever downgrade of the U.S. credit rating, the fiscal cliff, sequestration, the debt ceiling battles, the Cyprus bank failures, the recent emerging market currency panic, the start of the tapering process and the latest ostensible market roadblock, namely the attempt by Russia to annex Crimea.
And through all these difficulties, the market has shown an astounding resiliency, as after initial selloffs of various intensities, the indexes as mentioned above have all been able to absorb the selling and move to never-before-seen new highs. Last weekmarket action followed the exact same pattern.
After the third large selloff of triple-digit Dow proportions to start the third month of 2014, stocks made a very large upside reversal last Tuesday which more than made up for the losses that sellers inflicted on stocks the day before. The reason put forward for this tremendous turnaround was that Russian President Putin all of a sudden announced that there was no need to use military action in Crimea for now but he did reserve the right to use force in the Ukraine as a last resort. He also added that Western sanctions under consideration against Russia would be counterproductive. I also believe that he was under pressure from Russian investors who saw $13 billion of their holdings evaporate as the Russian stock market declined by 11 percent alone last Monday, the Russian ruble fell to a record low against the dollar and interest rates in that country rose as the central bank there tried to defend the currency.
This is the major difference between the Hungarian invasion of 1956, the Czechoslovakian invasion of 1968, and now — namely, that in those Soviet Union days there was no stock market in Russia, but today all of the world’s economies are much more intertwined and Putin cannot afford to ignore the message of the markets, something the former Communist leaders did not have to worry about. This is why, for all the bluster and posturing on both sides, chances of an armed conflict remain very small, and stock markets around the world are starting to discount this possibility.
Before Monday’s nominal setback, the S&P had achieved new all-time highs five times in the past seven sessions. This resulted in the second week of gains for both the S&P and the Dow, while the Nasdaq completed its fifth-straight week of advances despite two lower sessions to end the week. And for some strange reason, Monday is turning out to be the worst day of the week for the market so far this year as it has been lower for six of the eight Mondays (two Monday federal holidays not included).
Economic reports were on the mixed side, showing an economy that continues to show modest improvement as the February ISM Non-Manufacturing Survey, which covers over 80 percent of the economy, saw the slowest rate of expansion in four years, the Fed Beige Book of economic conditions in various districts of the country mentioned “improved levels of activity with modest to moderate growth,” weekly jobless claims fell to their lowest level in three months and January factory orders fell by 0.7 percent.
The big surprise was the February jobs report, which showed that employers added 175,000 positions to their payrolls last month and the January number was revised upward to 129,000. The unemployment rate rose to 6.7 percent from a five-year low of 6.6 percent and this was the result of an increase in the size of the workforce as more people looked for jobs. The average workweek fell to its lowest level since January 2011, most likely the result of weather-related disruptions. Manufacturing jobs increased for the seventh straight month and construction jobs increased as well.
Fed officials have viewed the recent weakness in job creation in the two prior reports to this one as largely weather-related and temporary, and they also consider the slowdown in retail sales, industrial production and home building activity to have been negatively influenced by weather as well. Because of this, the New York Fed president recently said that the economic outlook would have to change significantly for the central bank to not wind down its monthly bond purchase stimulus program in a series of measured steps that will end the program late this year. As a result, most investors expect the Fed will announce further tapering of the stimulus program at next week’s F.O.M.C. meeting.
Due to the quantitative easing, interest rates have remained at very low levels, which has allowed the most credit-worthy companies to borrow huge sums of money for next to nothing and they have then returned this money to shareholders in the form of dividend increases, share buybacks and large acquisitions such as we have seen this year. In addition, the Fed’s actions have allowed automobile companies to offer cut-rate car loans as well.
Some observers attribute the economic sluggishness to the fact that businesses are working their way through a large inventory accumulation from the second half of 2013 which means that they have little incentive to place new orders with manufacturers. In addition, the expiration of long-term unemployment benefits for more than one million Americans this past December could be curtailing spending as well.
But for those who think that the market is approaching a top, let it be pointed out that this is only the sixth longest bull market in history in terms of length — 1,823 days as opposed to the longest, which was the 4,494 days of the December 1987 to March 2000 upside run that encompassed a gain of a mere 582 percent versus the current 180 percent advance from the March 2009 lows. If other benchmarks get surpassed by the current bull move, they will be duly noted either for time or percentage increase, as the gains this time represent the fourth largest in terms of price increases.
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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