Friday started strong and faded a bit, but we still saw the Dow and the S&P 500 hit all-time highs. The Nasdaq was on board as well, and it touched yet another 14-year high. So overall, it was a great way to close out the day. For the week, the Dow was up 1%, the Nasdaq gained 0.5% and the S&P 500 rose 1.2%. The only negative was the fact that stocks started Friday strong, but faded throughout the session. Bulls would have rather seen a slow or down open that rallied into the close, but Friday played out in the opposite direction. The session closed out positive, though, and that was fine with the bulls, who went into the weekend with a much-needed win.
All-time highs are always a good sign of a strong stock market, but there are still some dark clouds on the horizon. We have had a lot of favorable economic news about the U.S. economy lately, but global fears and potential “global shocks” remain. In the last week, housing numbers were good, as were inflation numbers, which helped keep Wall Street in its buoyant mood. The Philly Fed manufacturing numbers this past week showed that the mid-Atlantic region was humming, and we even had an uptick in the Index of Leading Economic Indicators (LEI). So what on earth could go wrong?
The stock market gave a gigantic “wake up” call through mid-October with the harrowing plunge that took the S&P 500 down nearly 10%. The subsequent rally still has market sages scratching their heads, and most of them agree that a 10% plunge and a 10% rally is not an ordinary event. Just looking at the one or three-month chart is mind-boggling to say the least. High-speed “corrections” of that nature do not happen that often, and by the speed of it, the broader investing public never even noticed it at all. Likewise, even the institutions did not have time to react.
The big October plunge was over and done with quickly thanks to the strange comment from the Fed’s James Bullard that the Fed might consider extending its bond-purchase program that ended at the end of October. The “real” Fed comments that came out regarding that pre-Halloween meeting were low-key and tame, but they did not matter that much since the stock market bounce back was so vibrant and already in motion. The “minutes” we saw this week from that late-October meeting showed a Federal Reserve that was doing its best to not rattle global financial markets.
According to the minutes, Janet Yellen and her team did their best to not comment on market conditions, volatility or the big decline in equity prices. The Fed instead extended its promise to keep interest rates low for a “considerable period,” and it also went along with the premise that all was well. The Fed said that it would continue to monitor inflation, housing and employment levels, and that it would act accordingly if there were any changes or developments. Again, the Fed’s comments came after the stock market had already rallied quite a bit, so you have to give them credit for leaving “well-enough” alone.
One problem with “well enough” is that it is focused more on the domestic U.S. economy rather than the world. Fears of a global GDP slowdown are still front and center, and while the U.S. seems immune right now from a global slowdown, a global slowdown will eventually hit the U.S. economy if it does occur. The stimulus programs and promises by Japan and the EU are not exactly a sign of economic vibrancy, and the fact that these economic powerhouses are still ‘stimulating” their economies is cause for concern.
It is almost like giving “mouth-to-mouth” to a dying patient in that by launching new “stimulus” programs six years into an economic “recovery,” Japan and the EU are saying that the patient is still not breathing. If bailouts, stimulus, and printing money paved the path to economic prosperity, then governments around the world would have been doing it forever. It is not a “magic wand,” but it is what Western Central banks have chosen to do. The money slushes around, and the buzzword out there now is that it creates “mal-investment,” meaning that the funny money gravitates toward inefficient endeavors.
Throw into this mal-investment mix the fact that “savers” that have their money in banks earning zero interest, and you have the makings of something we have never before seen. Ben Bernanke may have helped us avoid a second Great Depression, but the jury is still out on what zero interest rates and trillions of dollars of Federal Reserve asset-buying eventually leads to. Who knows, because we are in a new world, where these sorts of actions have never taken place. Once again, time will tell.
As complex and confusing as the Fed’s actions of the past six years were, there is no use in warning the bulls about possible troubles. The stock market is at an all-time high, and that speaks volumes. Whatever the Fed did or is doing has worked, at least for the time being, and there are few complaints on Wall Street. We are in that “sweet spot” time of year, when the Thanksgiving Rally, the Santa Claus Rally and the New Year’s rally are all kicking into overdrive, and it might be smartest to just sit back and enjoy the ride.
That said, the Gorilla wishes each and all a relaxing autumn weekend. Thanksgiving is just around the corner, and, yes, the Gorilla will be sending out his world famous Banana Stuffing recipe next week to use for your Thanksgiving feast. Have a wonderful weekend, and we will be back in action on Monday!
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