Nasdaq Reaches a 14-Year High as Investors Ignore Geopolitical Events

The headline in last week’s column read “The Stock Market Rebounds From Panic Geopolitical Selling” and this theme continued during the past week as well, as equities put in a very strong performance for the remainder of last week and began the new week this Monday with another powerful upside burst.

What this meant was that once again, the correct approach to the market was exactly the one I had spelled out in the final sentence of last week’s column as well when I said that “Investors should use these dips in the market to buy good stocks that get sold off for no fundamental reason and just get caught up in the emotional selling that manifests itself from time to time.”

And this strategy worked like a charm as last Friday, after the market was on the verge of putting in its best weekly performance of the year, another one in a string of fictitious reports came out of that eastern Ukraine/Russian border area that turned an initial Dow advance of 61 points into an intraday decline of 139, which meant that the Dow underwent a 200 point downside reversal in a matter of 90 minutes!

And the supposed “explanation” for this dramatic negative turnaround was a nebulous report that Ukrainian artillery had destroyed a “significant” part of a Russian armored column that had crossed into Ukraine, as this column was ostensibly tracked as soon as it had crossed into the country itself. A military spokesman said that “appropriate actions were undertaken and a part of the column no longer exists” without offering any proof of this claim. And then Russia naturally denied that any of its vehicles, either civilian or military, had crossed the border.

Are rational investors supposed to believe any of this nonsense and sell stocks like they did on Friday, based on what comes out of that strange part of the world? And talking about strange, look at that convoy of 262 white trucks all driven by identically dressed “volunteers” who have refused to say who sent them there. And since Ukrainian authorities do not believe that these trucks are filled with food and other aid items and basically feel that the Russians are trying to sneak military supplies into their country, they have not allowed them to pass through until the Red Cross inspects them.

And this fiasco goes along with the denial by Russia that they are supporting the secessionist rebels in Donetsk and Luhansk even though these groups are armed and backed by Russia and many of these fighters are Russian citizens.

From the Ukrainian/Russian-induced lows of last Friday as mentioned above, cooler heads prevailed and the Dow was able to cut that 139 point decline into a closing loss of 50, while the S&P ended unchanged and the Nasdaq actually had the nerve to finish higher. It was the best weekly performance for the latter index since May and the best showing for the S&P since early July.

After that Friday comeback from the worst levels of the day, the bullish juices continued to flow on Monday as the Nasdaq ended at its highest level since March 31, 2000 when it was on the way down from its record high close achieved earlier that month. The Dow put in its eighth-best one-day showing of the year with a strong 175 point gain while the Dow Jones Transportation is within hailing distance of its all-time high reached last month.

So why has the market once again shown this resiliency to bounce back from selloffs, as despite all kinds of dire predictions from various market experts that investors should be prepared for a “correction” of 10 percent or more, the best that the bearish contingent could extract from the S&P has been a 3.9 percent pullback from the July 24 high of 1987? It ended at 1971 after Monday’s powerful showing.

The first reason is that second-quarter earnings have come in much better than consensus, as with the reporting period just about over, profits have risen by 10.2 percent while revenues have been ahead by 4.4 percent.

The second is that bond yields, which compete for investment dollars with stocks, have remained negligible due to record low rates in other parts of the world, as the German 10-year Note fell to under 1 percent while those in Japan are at .50 percent, and these are the fourth and third largest economies in the world. That is why rates here have fallen as the 10-year Treasury Note is at its lowest level in more than a year at 2.38 percent. Of course, there are hundreds of blue-chip stocks whose dividend yield is higher than that and there is always the possibility of capital gains as well through price appreciation of the shares that a person buys.

The Federal Reserve has stated that it will keep rates at these record low levels for the foreseeable future as the economic recovery has been uneven and inflation is not a threat at the present time. This was illustrated by economic reports released in the past week that showed July retail sales were unchanged, their worst showing in six months, weekly jobless claims rose for the first time in six weeks, the July import price index declined by 0.2 percent, the August N.Y. State Empire Manufacturing Survey showed a decline when an increase was expected, the July Producer Price Index rose by a scant 0.1 percent, July industrial production rose at its fastest rate in five months, the August preliminary U. of Michigan Consumer Sentiment Survey declined to its lowest level since last November while the August NAHB Housing Market Index reached its highest level in seven months. Certainly the mixed nature of these reports illustrates the uneven theme mentioned at the start of this paragraph with no price pressures present at all.

There will be two important events this week, the first being today’s publication of the minutes of last month’s F.O.M.C. meeting which will give investors some insight into the Fed’s latest thinking about trends in the economy and the direction of interest rates. On Thursday, at the annual Fed gathering in Jackson Hole, Wyoming, both Fed Chair Janet Yellen and E.C.B. President Mario Draghi will be the featured speakers and what they have to say could determine near-term market direction as well.

This article appeared in print on page 27 of the August 20th, 2014 edition of Hamodia.