Last week’s headline stated that the Dow and S&P were “languishing” at current levels, “waiting for a reason to advance further.” Well, they certainly got those reasons last week, as for three consecutive sessions leading up to the July 4 market close on Friday, both indices attained new all-time record high levels. In addition, the Dow Jones Transportation Average reached never-before seen heights as well.
The most important upside motivator was the June non-farm payrolls report released on Thursday, which allowed the Dow to finally cross another nice round number barrier as it ended at 17,068, higher than it had ever been. The S&P also attained never-before seen levels as it closed at 1985.44, which was its 25th record high close this year.
The number of jobs created last month was officially reported at 288,000 which was well above the highest estimates out there. This followed a gain of 224,000 in May, which was also higher than initially reported. The total upward revision for April and May was an additional 29,000 more jobs. The unemployment rate declined to its lowest level since September 2008 at 6.1 percent. This meant that the first half of 2014 saw an average monthly job growth of 231,000, the best such showing since the spring of 2006. Average hourly earnings showed a 0.2 percent increase. But the labor force participation rate remained at only 62.8 percent, still near a 35-year low. This number represents the share of working-age Americans who are employed or at least looking for a job as a percentage of the working age population.
Job gains were spread across all sectors, as service-industries employment rose by 236,000, the largest gain since October 2012. Manufacturing payrolls rose by 16,000 which was the 11th straight monthly gain, and construction jobs advanced for the sixth consecutive month. Even government jobs increased, with a 26,000 gain. The length of the average workweek held steady at a post-recession high of 34.5 hours, while total hours worked increased by 0.2 percent.
Other economic reports released last week provided further evidence that the economy was indeed shaking off the effects that the miserable first-quarter weather had imposed upon it, as the June ISM Manufacturing Survey advanced for the 15th consecutive month, May construction spending increased, June vehicle sales rose to their highest level since July 2006, and May factory orders excluding military spending were higher as well.
Stocks were also helped by mid-week comments from Fed Chair Janet Yellen, who said that the central bank was not going to raise rates in order to deflate “bubbles in financial markets,” meaning that higher interest rates are not the answer to financial excesses. She stressed that “monetary policy faces significant limitations as a tool to promote financial stability,” and added that “its effects on financial vulnerabilities are not well understood and are less direct than a regulatory or supervisory approach. In addition, efforts to promote financial stability through adjustments in interest rates would increase the volatility of inflation and employment.”
She did not rule out using interest rate policy as a tool to combat financial excess, while making clear it is a less than optimal option. But with these comments, she put banks and everyone else in the financial world on notice: The Fed is not going to protect you from making mistakes. It is just going to try to ensure that if you do make them, the rest of us will not pay the consequences. It is a certainty that the Yellen Fed will raise interest rates one day, obviously sometime next year, but they will do so because the United States economy is getting back on its feet, not to lean against the potential excesses of markets.
As the new week began on Monday, the market ran out of steam after last week’s record upside party as investors could not find any new reasons to push things higher for the time being. Various “explanations” were offered for the modest setback, but last week’s surge left the market in an extremely overbought position, as for instance the market volatility index, known as the VIX, declined close to as low as it can ever get, at 10.32. Since it is a known historical fact that the VIX, which moves inversely to stocks, cannot go below 10, when it declines to this low a level, the leanest since February 2007, the probabilities favor it moving higher, or further away from this area. Since the only way that this can occur is for stocks to go lower, this was as good a reason as any for equities to modestly retreat. And this can certainly be borne out by the fact that nothing had fundamentally changed from late last week to the start of this week, save for the ongoing debate about when the Fed is going to finally raise interest rates from the record low levels that they have been at since December 2008: between zero and one-quarter of a percent.
Last week I mentioned some statistics that illustrated how “calm” things have been and to this another one might be useful as well, as the S&P has remained above its 200-day moving average (the average closing price over the past 200 days divided by 200) for 400 consecutive trading days. This is the second highest such achievement in the past 50 years, and means that basically stocks have been in a steady uptrend for a very long period of time.
What might lead to a continuation of this pattern or perhaps a deviation from it is today’s 2 p.m. release of the minutes of the last F.O.M.C. meeting, from which investors can read the tea leaves in an effort to determine the central bank’s latest interest rate thinking. In addition, this week marks the official start of the second-quarter earnings reporting season and projections are now for an increase of around five percent with revenue growth of three percent. This was about what the first-quarter gain was, and any change from these numbers in either direction will go a long way toward determining the next major move for stocks. The two most important companies that we will hear from this week are AA and WFC, before the number of stocks reporting in the two following weeks reaches its crescendo.