New Highs for the Market Averages! Now What?
Markets continued their rally last week, with the Dow cracking 14,000 for the first time since 2007. Boosted by positive employment news, all the major indices are doing well, with the S&P posting its longest winning streak since 2004. For the week, the S&P 500 gained 0.68%, the Dow gained 0.82%, and the Nasdaq gained 0.93%. The Dow is now up 6.9% in 2013 and has rallied 114% since the bear market low in March 2009.
Last week saw the release of a flood of economic data. In an unexpected surprise, U.S. GDP contracted in the fourth quarter by 0.1%. Fortunately, economists believe that the number is artificially low because of some unusual factors, including lower defense spending. Increases in consumer spending, construction, and business investment showed that the economy is still on a moderate growth path, and absent certain oddities, would have grown at a very respectable 2.5%.
January’s final consumer sentiment number beat expectations, as consumers regained confidence lost during December’s fiscal cliff debate; though people are still worried about the new tax increases and gas price hikes. The latest employment numbers show that the unemployment rate ticked up to 7.9%, however, some of the increase is seasonal in nature. Even better, economists are revising their 2012 employment numbers as more jobs were created than they originally thought.
As earnings season wraps up, we can say that the trend has been just “good enough;” not great, but not awful either. Total earnings for S&P 500 companies that have already reported are up nearly 2% over the third quarter, meaning that companies are doing better than last year. Generally speaking, executives are upbeat about future earnings and business conditions, meaning we could see even better performance in the first quarter.
After last week’s flood of economic reports, this week will be slow in terms of data; however, analysts will be looking at Thursday’s jobs report and productivity to determine whether the economy is still on a positive trend. While we’re happy that the market is experiencing a rally out of the gate, now that we’re pushing close to historic highs, let’s talk about what could cause markets to pull back. With next week so light on data, it’s possible that traders will turn their attention to the so-called “sequester cliff,” the mandatory federal spending cuts due to hit March 1, and the ongoing debt ceiling deliberations in Washington. While many economists don’t see the sequester as a huge problem, it will adversely affect certain sectors (such as defense) and possibly cause market jitters.
As stocks move towards a sixth week of gains, it’s good to keep in mind that the markets are cyclical in nature, and that ups and downs are both elements of healthy markets. Whether the bull keeps running or loses some steam, our focus will remain on helping our clients make appropriate investment decisions in harmony with their personal financial goals - something we do in every market environment.
Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Google Finance, Yahoo! Finance, MSCI Barra. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not available.
HEADLINES:
Manufacturing grows at highest pace in nine months. The pace of U.S. manufacturing growth grew rapidly in January as new orders and employment increased. The rate is the highest since April of last year.
Superbowl-related spending could reach $10 billion. With nearly 100 million fans watching the big game, retailers are expecting consumers to spend as much as $9.6 billion on snacks, alcohol, team memorabilia, and electronics this year.
U.S. construction sites boost hiring. 82,000 new construction jobs were added between November and January, the biggest three-month gain since April 2006, indicating that we can expect a strong performance from the housing and construction sector this quarter.
Baltimore Ravens claim Superbowl XLVII. The exciting game between the Ravens and San Francisco 49ers was decided in the final minutes, with the final score 34-31 Ravens.
QUOTE OF THE WEEK:
“The only way of finding the limits of the possible is by going beyond them into the impossible.” - Arthur C. Clarke
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