The market ended the first half of the year with modest gains, but let it also be remembered that this better showing has to be considered an accomplishment coming on the heels of last year’s 30 percent advance in the S&P, which is historically way above the average gain for this index. Since the introduction of the S&P in 1928, it has averaged a yearly up move of around eight percent.
As of June 30, the Dow was ahead by 1.5 percent, the S&P has gained 6 percent while the Nasdaq is up by 5.5 percent. The Russell 2000 Index of small stocks is higher by 2.4 percent but it should also be noted that it gained 5.2 percent in June alone, its best such monthly showing since last September and this has to be considered quite an accomplishment because it had undergone an official downside “correction” of 10 percent from its early-March high until its mid-May low as the high-flying social media, Internet and biotechnology stocks fell out of favor because of fears that they were “overvalued.”
All of this has been accomplished in an atmosphere of low volatility as the S&P has not had a closing change of one percent in either direction for 51 straight days now, the longest such streak since 1995 but still far from the most extensive lack of such movement as detailed in last week’s column.
This lack of sharp movement is a cause of great consternation to those who thrive on such type of market action, and this group primarily consists of the “high-frequency” traders who try to exploit market changes during the day for their own advantage and without any real investment goals in mind. It is my belief that the average investors should relish this lack of volatility because it gives people the chance to enter and exit positions without the stress of having to “chase” the market on the upside, or sell out at disadvantageous levels on the downside.
Despite the fact that both the Dow and the S&P have finished lower for two out of the past three weeks, the overall picture for stocks remains healthy. The reason for the hesitation at current levels is that there does not seem to be a strong upside motivator for equities at the present time. This of course could change with some important economic releases tomorrow and also with the start of the earnings reporting period in a couple of weeks. Let it also be remembered that despite the hesitation at current levels, the S&P has now advanced for six straight quarters for the first time since 1998.
The big economic event this past week was the miserable final revision of the first-quarter G.D.P. which showed an astonishing decline of 2.9 percent, the worst such performance since the first three months of 2009, right at the bottom of the Great Recession. The culprits for this decline, aside from the awful weather that afflicted many parts of the country, were lower consumer spending largely due to contractions in health care outlays, and this is obviously a function of the Affordable Care Act.
In addition, lower inventory accumulation by businesses subtracted a significant amount from the final number, but this should be reversed going forward. The current prediction is for growth of around 3 percent during the second quarter and 2.2 percent gains for the entire year according to the Federal Reserve.
There were three other economic releases that gave investors pause as well, with the overall May durable goods number at a 1 percent decline, but non-military capital goods orders excluding aircraft, which most closely matches spending by businesses, were ahead by 0.7 percent. The other release that gave investors reason to pause was that May personal spending rose by only 0.2 percent, or half of what the consensus was. This shows that consumers were cautious as the second quarter got underway. In addition, the June Chicago Purchasing Managers’ Survey declined a bit from its recent high in April, its best reading in four months.
On the more optimistic side, May pending home sales showed their largest increase in more than four years with a gain of 6.1 percent and weekly jobless claims fell by 2,000 down to 312,000.
Another kerfuffle erupted when St. Louis Fed President James Bullard had the audacity to say that interest rates may start to rise in March, and these comments were completely contrary to those made by Fed Chair Janet Yellen the week before during her press conference after the F.O.M.C. statement. She had mentioned “policy accommodation” will last for an “extended period of time.” His argument was that he believes that unemployment will decline below 6 percent and that inflation will rise to the Fed’s target of 2 percent by that time. This means that since these Federal Reserve goals will have been met, there would now have to be “normalization” of policy, which basically means higher interest rates from their current record low levels of between zero to one-quarter of a percent that have been in effect since December 2008. Mr. Bullard also thought that the economy may advance by 3 percent in coming quarters, a bit above current thinking and, for what it is worth, he is not a voting member of the F.O.M.C. either this year or next.
What could or could not give the market a jolt tomorrow is the release of the June jobs report, for which the consensus is a gain of 210,000 as compared to May’s 217,000. Then next week and the two weeks after that, the start of the second-quarter earnings reporting period will be in full swing and estimates have now been lowered to a gain of 5.2 percent while revenues are expected to have increased by 3.2 percent and these numbers have been shaved from 7.4 percent and 4.2 percent respectively as recently as April.
Despite all the naysayers out there who talk about stocks being overvalued, it should be pointed out that this bull market is now in its 63rd month and this compares to the average length of 59 months for the 11 bull markets since 1949. Let it also be pointed out that there have been others that have lasted longer and gained more than the current 185 percent S&P advance off the market lows in March 2009.
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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