Was that any way to celebrate a bull’s 6th birthday?
Both the Dow and the S&P500 achieved new all-time high valuations on the second of March. That same day, the NASDAQ closed above 5000 for the first time in 15 years. As an aside, having now participated in both “5000s”, seems to me that it’s like having seen a formerly rowdy teen mature into a well-rounded adult…
With the 9th being the anniversary of the start of this bull market – one which, according to S&P/Dow Jones Indices, has seen the S&P500 rise 215% since that time (252% with dividends) – you’d think that maybe we’d have seen some positive carryforward into the end of the past week.
Almost since it began, for reasons that have never been clear to me, this has been the most hated bull market in history. It has, and continues to, defy the negative Every new high seems to disappoint the forecasters of doom and gloom. It’s odd how good news upsets some people.
It appeared that Friday would definitely bring a positive end to the trading week when, in spite of the weather effect over much of the country, February’s non-farm payrolls report showed a gain of another 295,000 jobs – well above the 240,000 expected. Unemployment fell in every state! That hasn’t happened since 1984. Here’s proof the economy is expanding. What good news!
That is, unless you’re a Wall Street trader…one who sees good news as bad. (To be fair, they also see bad news as bad…) Their negative views of the jobs report caused the Dow and S&P to drop about 1.50% Friday. What made them sell?
Trader’s view
It’s all related to interest rates. Interest rates rising is seen as bad because, in the minds of many, or, “as everyone knows”, stocks will go down…
There was the news before we opened Friday that the European Central Bank (ECB) said it will begin its massive bond-buying program on Monday, March 9. It’s scheduled to last through September 2016. That official announcement moved our dollar to an 11-year high against a basket of major currencies. This, in turn, caused our 10 year note to rise in yield to 2.25%; all the way up from just 2.00% the Friday before.
The effect of that little bump up in rates was demonstrated when we had the Dow Utilities Index fall below its 200-day moving average for the first time since January 2014. In the S&P 500, utilities fell more than 3 percent as the worst sector that day.
As the bond rates went up, the prices of current bonds and bond equivalents such as utility shares went lower and gold erased all its gains for the year. That all occurred as a direct result of the good jobs report.
That’s because our steadily increasing employment suggests strongly that the Fed will now be further motivated to finally begin moving away from its long-time Fed Funds rate range of 0.00% – 0.25% – likely as early as its June meeting. Can’t really justify rates supporting no growth when it’s demonstrably here, can we?
A little perspective on current interest rates
Regular readers and listeners know I’ve been saying for some time that when we first had inklings that the Fed would be raising rates, the markets would likely sell off and the end of the market’s good days crowd would be all over the airwaves and social media. We had a whiff of that on Friday.
Historically, when the 10 year Treasury rates are lots higher than today – maybe at 5% + – an investment case can be made for favoring bonds over stocks. Ignoring taxes, inflation and personal need for now, that’s simply because you get a predictable income for a specific period with bonds, unlike the fluctuations you go through in order to earn your stock return premium potential.
If you add our Gross Domestic Product (GDP) growth with the inflation rate, you get what can be said is what a “normal” Fed Fund interest rate should be. Right now, that equates to about 3.50%. Said differently, the Fed would have to raise rates from, effectively, zero to this point just to be normal…meaning the stock market can and could function quite nicely, thank you.
Speed of climb
Talking about interest rates, not aircraft here.
Back in the interest rate day, Messrs. Greenspan and Bernanke raised rates by ¼ percent at each of the Fed meetings from mid-2004 through mid-2006. Miz Yellen and her cohorts are, in my opinion, likely to go more slowly in order to determine the effects on the economy moving the Fed Funds rate to 1.00% by this year-end.
Right now, based on the effects of past political and monetary policies, no one – including the Fed – knows if this re-engagement will work as planned. Personally, I don’t see why it shouldn’t.
I wouldn’t worry either about this starting of rate hikes affecting the stock market negatively. The Fed has no desire to choke off growth. It’s not that money will now be tight…it’ll just be less loose.
Summary
The selling on Friday seemed like nothing more than a big over-reactive, knee jerk trader response to news that’s really good for our economy and, ultimately, the markets.
Because the interest rates are low, and will continue relatively so for a while, the overall stock market remains cheap. Except for certain parts of the energy sector, corporate earnings continue to grow. Historically, stocks have often gone up ahead of actual larger interest rate hikes. That’s because prices for goods and services are also likely rising and purchases get accelerated.
At this stage in the market evolution, sectors such as health care, consumer discretionary, tech and financials tend to do well. Also, a sector that may see some good growth could be domestic oil infrastructure. I offer that one simply because the International Energy Agency forecasts North America will invest $2.5 trillion there over the next 20 years.
When we’re at new highs, no one has any idea how high we can get from here. For me, I see no systemic or market trend reasons why we shouldn’t be able to continue to grow from here. When you talk with or hear those full of chapter and verse why we’re ready to drop; why the end is near, etc., remember this. Pessimism is seductive because the arguments can always be made to sound smarter, especially when they dovetail with your own worries.
Mr. Buffett in his 2014 letter to shareholders, offered what I believe is good guidance for all of us, regardless of where an index may be currently. He said,
“Though the preachers of pessimism prattle endlessly about America’s problems, I’ve never seen one who wishes to emigrate (though I can think of a few for whom I would happily buy a one-way ticket).
The dynamism embedded in our market economy will continue to work its magic. Gains won’t come in a smooth or uninterrupted manner; they never have. And we will regularly grumble about our government. But, most assuredly, America’s best days lie ahead.”
Please let me know how I can help you get to where you want to be…
Cheers!
Mike
Securities and Investment Advisory Services offered through KMS Financial Services, Inc.
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