Dow and S&P Continue to Make New Highs on an Almost Daily Basis

In one of the most astounding and consistent up-moves in market history, the Dow Jones Industrial Average, the S&P and the Dow Jones Transportation Index have been grinding higher day after day these past two weeks in a completely calm and steady pattern. This has befuddled those in the bearish camp who say that such a steady move higher is bound to be met with some sort of selling in the near future. In the meantime, the burden of proof is on the negative crowd to prove their belief that the market is indeed overbought and in need of some sort of cooling off.

To illustrate the consistency of this recent pattern, as of Monday the S&P had attained new record all-time highs in seven of the past eight sessions, both the Dow and S&P advanced in 13 of the past 16 sessions, both of these averages attained their first three-week winning streaks of the year, and the Nasdaq has now advanced for four straight weeks.

In addition, the Nasdaq 100 Index, which consists of the largest non-financial, primarily technology companies, attained its highest level in 13 years and the Russell 2000 Index of small stocks is now ahead for 2014 after having undergone a 10 percent downside “correction” off its early March all-time highs. This correction occurred because investors believed that social media, internet and biotechnology stocks had gotten ahead of themselves in terms of their valuation and needed to be brought back down to earth, so to speak.

The question then is — what has been responsible for this steady move higher? And the answer comes from many directions, the first of which is that earnings growth for the first quarter of this year came in higher than the supposed experts had originally predicted, as for instance in mid-April after a sharp downside move, it was estimated that profit growth in the first three months of the year would be ahead by only 0.9 percent, when in fact after all was said and done, companies in the S&P reported earnings gains of 5.5 percent and revenue growth of over 3 percent.

The second reason for the steady market advance is the fact that despite the Federal Reserve continuing with its tapering of the $85 billion stimulus bond-buying program by $10 billion a month, the central bank has indicated that “policy will remain highly accommodative” and that they expect inflation to remain well below their two percent target. This means that any sort of increase in the federal funds rate from its current level of between zero and one-quarter percent will not take place until at least mid-2015 at the earliest.

At the same time that the Fed is beginning to remove its easiest money policies through the tapering program, the European Central Bank has gone in the opposite direction as it cut interest rates to record lows last week and launched a series of measures to pump money into the sluggish E.U. economy. For the first time ever, the E.C.B. will charge banks for parking funds at the central bank overnight in an attempt to force them to lend to businesses. These measures were also aimed at easing pressure on the strong euro, which is threatening the economic recovery and was also importing disinflation by making the prices of overseas goods cheaper in euro terms.

By lowering the main refinancing rate to 0.15 percent and pushing the deposit rate to a negative 0.1 percent, the E.C.B. is attempting with this ever cheaper money and penalty rates on deposits to shift capital flows to the weak economies of southern Europe, namely Spain, Italy and Greece at the expense of savers in northern Europe such as Germany, the Netherlands and Austria.

As a result, bond yields in the weak southern economies have fallen to record lows, which is the main reason that bond yields in the U.S. have remained lower despite most experts saying that they would rise this year as our economy started to improve. Of course, these lower interest rates in the U.S. have been another reason why investors have turned to the stock market in search of better returns on their money.

Finally, economic reports have shown that our economy is emerging from its first-quarter winter-induced contraction as the consensus is now for second-quarter growth to reach almost four percent. As an example of this, the May ISM Manufacturing Survey reached its fastest growth pace this year, April factory orders rose for the third straight month, the May ISM Non-Manufacturing Survey rose at the fastest pace in nine months, the Fed Beige Book of economic conditions in various parts of the country showed “modest to moderate growth” led by auto sales, and the May jobs report marked a fourth-straight month of job gains above 200,000 for the first time since January 2000.

This report showed that the economy had finally recouped the 8.7 million jobs that were lost during the Great Recession, but at the same time it took 77 months to do so, which was the longest time needed to regain jobs lost in a recession. The unemployment rate held steady at a five and a half-year low of 6.3 percent but the labor force participation rate, or share of working-age Americans who are employed or at least looking for a job, held steady at a multi-decade low of 62.8 percent.

Manufacturing payrolls increased by 10,000, expanding for the tenth straight month, and construction jobs rose by 6,000, their fifth consecutive month of gains. Government payrolls increased by 1,000, which was their fourth-straight monthly gain.

As an illustration of how calm this advance has been, the volatility index, otherwise known as the VIX, which moves in the opposite overall direction of the stock market, fell to its lowest closing level since February 2007 on Friday with a price under 11, which it has been at only 1.8 percent of the time since 1990. This shows an extreme level of complacency among investors that often marks the beginning of some sort of market correction. On the other hand, there have also been months when the VIX does in fact remain at these low levels and the market advances, such as in 2006–2007.

One of these days the market will undergo some sort of selloff, but until then the path of least resistance is certainly higher.

This article appeared in print on page 41 of the June 11th, 2014 edition of Hamodia.