The S&P Reaches a New Record High as It Overcomes Various Obstacles

One of the oldest expressions in the investing business is that “markets climb a wall of worry,” and what has taken place lately is a perfect example of this. In other words, despite ostensible investor “concerns” about the Federal Reserve winding down its stimulus program by October and the inevitable increase in interest rates sometime next year, an uneven economic recovery and the potential threats from geopolitical hotspots such as eastern Ukraine, Iraq and Gaza, the S&P closed at its highest level ever on Monday as it crossed the 2000 barrier for the first time in its history. Even though it fell back from its intraday high of 2002, it did manage to end at 1998, which is its highest close ever.

And along with that best-ever close, the NDX, which consists of the 100 largest non-financial stocks in the Nasdaq (primarily technology and biotech issues), ended higher for the ninth-straight day and the Nasdaq itself finished at its best level in 14-and-a-half years. The latter ended at its highest point since March 2000, when it was on the way down from its dramatic close of 5000 at the height of the internet technology bubble.

The market is being driven higher by a wonderful combination of factors that make owning stocks the best choice for investor dollars, as for instance the second-quarter earnings season, which has come to a close, saw an S&P earnings advance of 10.2 percent and revenue gains of 4.4 percent. This is better than what was projected at the start of the earnings period last month, as 73 percent of companies have beaten their profit estimates while 64 percent have beaten on the top line. This compares to 64 percent and 61 percent better numbers respectively over the past several years.

In addition, despite evidence of an economic recovery and the end of the Fed’s QE stimulus programs soon, bond yields have remained stubbornly low, and since bonds compete with stocks for investment dollars, the ongoing paltry returns from fixed-income have also resulted in money being directed toward equities. Perhaps the main reason for the persistence of these low yields in the U.S. is the fact that yields in other major industrialized countries are even lower, as for instance the 10-year German bund in the world’s fourth-largest economy broke below one percent this week and their shorter-term obligations actually have a negative yield, if one can fathom that! The world’s third-largest economy, Japan, has been stuck in a no-growth path since the late 1980s, and sports yields for its 10-year paper at less than half a percent. This means that the 2.39 percent yields offered by U.S. 10-year Treasury Notes seem like a bargain by some, which even though historically low, has resulted in the purchase of this paper by investors on a comparative basis. This has been the primary reason that yields here have declined this year from around three percent at the start of 2014.

As mentioned in last week’s column, there were two major events that the market had to deal with: the release of the FOMC minutes of last month’s meeting and then the remarks from Fed Chair Janet Yellen and ECB  President Mario Draghi at the annual Jackson Hole, Wyoming Fed conclave. And both of these events actually turned out to non-events as the Fed minutes turned out to have tried to please everyone by first stating that “many members noted that if convergence toward the committee’s objectives occurred more quickly than expected, it might become appropriate to begin removing monetary policy accommodation sooner than currently anticipated.” Just when investors were about to interpret this as a signal that interest rates were going to be increased sooner rather than later, the second statement was released which said that “many members still see a larger gap between current labor market conditions and those consistent with their assessments of normal levels of labor utilization,” which meant that — hold everything, interest rates were now going to be held at record low levels for longer than expected, and how do you like that?

Then on Friday, Fed Chair Yellen again threw out everything but the kitchen sink as she basically gave a lecture on various labor market metrics while trying to please everyone with comments such as “the economy has made considerable progress in recovering from the largest and most sustained loss of employment since the Great Depression,” but then repeated that “underutilization of labor resources still remains significant.” She then added that determining when the job market has recovered fully is difficult, given the “depth of the damage” from the recession.

And similar to the FOMC statement of last Wednesday, she spoke out of both sides of her mouth when she said that if progress in labor markets “continues to be more rapid than anticipated,” an interest rate increase could come sooner than currently anticipated and further rate hikes could be more rapid. Then she calmed things down when she added that if the Fed’s goals of full employment and stable prices disappoints, then policy would be “more accommodative.”

Mr. Draghi also added nothing new when he repeated the same old things that he has been saying for the longest time, namely that the ECB “stands ready to adjust our policy stance further,” which means that they could become even more accommodative as long as the EU economies remain subdued and inflationary pressures stay low, as they are certainly doing.

Then there was the ongoing nonsense coming out of that strange part of the world otherwise known as eastern Ukraine, as for instance on Friday, NATO condemned the entry of the infamous Russian convoy into Ukraine as they saw it as an “alarming build-up” of Russian troops, and is that what these identically dressed truck drivers are disguised as? Ukraine itself regards these trucks as an “invasion,” even though they were supposed to be under the supervision of the Red Cross.

Then over the weekend there were reports of that sneaky Russian convoy pulling back out of Ukraine after all, and no wonder investors have rightfully ignored all of these bizarre events and self-serving statements made from politicians on both sides.

Finally, the month of August ends this week with a large amount of economic data that will be discussed in next week’s column.

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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