The S&P Continues Its Push to Higher And Higher Levels

In last week’s column I mentioned that “markets climb a wall of worry” and during the final week of August the “worrying” continued even more, as stocks ended the month with their best showing for this time of the year since 2000.  For August, the Dow rose by 3.2 percent, the S&P was ahead by 3.8 percent, while the Nasdaq advanced by 4.8 percent. In the process, these three major averages achieved their first four-weeks-in-a-row advance this year; the S&P closed at its highest level ever on four of the five trading days last week. It ended the month on Friday at 2003.37, as it continued to establish a new beachhead over the nice round 2000 number.

In other examples of how steady to the upside the latest market advance has been, the major averages have not undergone two down-days in a row since August 1, and the S&P has now gained in 12 out of the past 16 sessions. And the Nasdaq kept climbing as well, attaining its highest level in fourteen and a half years as it starts to get closer to the 5038 high that it reached in March 2000.     

And once again, the same factors that were mentioned last week continue to drive stocks to the upside, and they are: better than expected second-quarter earnings, bond yields that keep declining even further, thereby providing even less competition for investor dollars, and the realization that the United States still appears to be the safest haven for a people to invest their money in.

Economic data released last week once again pointed to a steady recovery with a lack of inflationary pressures, which creates the ideal investing environment. July durable goods orders rose by a record 22.6 percent, the result of an astounding 318 percent increase in airplane orders; August Consumer Confidence rose to its highest level since October 2007; weekly jobless claims declined for the second straight week, which could be a favorable harbinger for Friday’s August jobs report. July pending home sales gained by 3.3 percent, the August Chicago Purchasing Managers’ Survey showed a sharp increase, the final August U. of Michigan Consumer Sentiment Survey rose by more than expected, and the first revision of second-quarter GDP showed that the economy advanced by 4.2 percent during the three months of the year as opposed to the original report of a 4 percent increase.

The second-quarter gain was the result of gains in business spending and exports, but the most encouraging item going forward was that inventory accumulation was less than expected; this is a hopeful sign that businesses will have to re-stock their shelves to a greater extent than thought to meet demand in the third quarter.            

As mentioned above, stocks are getting little competition from bonds, as Treasury yields continue to decline here, with the all-important 10-year note at its lowest level in 15 months at 2.34 percent. This is primarily due to the fact that yields in other parts of the world are even lower, with the 10-year German bund at an all-time low of .93 percent as the largest economies in the EU slip into recession, and this includes France and Italy as well. It is widely expected that tomorrow the ECB will announce further policy easing in order to stimulate these moribund economies, and this could lower European yields even further.

And once again the market continues to ignore the geopolitical crises in other parts of the world, as on the only down day last week, Thursday, it was reported that those sneaky Russians were at it again as the Ukrainian president called an emergency security meeting to defend against what he called a “de facto” incursion. In addition, France and Germany threatened Russia with further sanctions after the pro-Russian insurgents increased their attacks on Ukrainian forces while taking control of additional towns outside of their strongholds of Donetsk and Luhansk in that strange part of the world. They apparently captured the town of Novoazovsk, the nerve of them, and to make the situation even worse, they extended their control around the Savur-Mohyla area as well, and one can be sure that on the next day that our stock market declines, this geopolitical worry “explanation” will be thrown out as the reason. Of course, if one looks at this situation from an investing standpoint alone, none of it has anything to do with the U.S. economy, although I would imagine that to impute the negative effect that these Ukrainian goings-on could have on our economy, one could say that Europe might be further adversely impacted by Russian retaliation as they are the continent’s largest trading partner. This might now hurt American multinational companies that do business in the EU, but that’s  a stretch; what’s certain is that this situation will be offered as an explanation if the market were to decline, but only for a lack of better reasons.

The major economic events this week are today’s release of the Fed Beige Book of economic conditions in various parts of the country and of course Friday’s jobs report. The current estimate is for the creation of around 230,000 positions, which would be the seventh month in a row of gains over 200,000, the longest such streak since 1997.

Finally, the month of September is last in performance since 1950 (it has been ahead 28 times and lower 34 times), ranking as the worst among the months at an average 1.1 percent decline going all the way back to the S&P’s inception in 1928. However, let us not get bent out of shape here; in years when the market was higher going into September as it has been this year, the month averaged a gain of 0.2 percent with positive returns half the time. And in the past decade, September has only seen declines in 2008 and 2011, and both of these years were unusual in the sense that the former marked the start of the financial meltdown and the latter was an ongoing fallout from the first ever downgrade of the U.S. credit rating by Standard and Poor’s, which resulted in the last time that the market has undergone a correction of more than 10 percent.       


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. 

If you have any questions, contact dselkin@nationalsecurities.com .