We may have closed negative for the major indices on Friday, but the stock market closed out a very impressive quarter that saw the Dow rise 4.6%, the Nasdaq leap 9.8% and the S&P 500 gain 5.5%. Those are impressive numbers for the first three months of a year that has been marked by political infighting here in the U.S., global uncertainties, a Federal Reserve rate hike, and the formalization of Brexit in the UK. Healthcare reform in the U.S. was pulled, but earnings season was still strong enough to keep the stock market afloat and near all-time highs. It may not have felt like a strong quarter for the stock market, but it was, and that has bulls feeling positive about the prospects for the rest of the year.
The past week was helped a lot by positive housing numbers that showed that both existing and new home sales are holding up very well. Yes, the light winter weather in February helped, but buyers are still stepping up to the plate ahead of what could be higher interest rates later this year. In addition to the great sales numbers we have seen for homes, the year-over-year price gains are strong as well. The combination of higher home prices, a rising stock market, and interest rates remaining relatively low are all combining to keep consumers in a very positive mood. The University of Michigan confidence number came in for March at 96.9, and while that was below the expected 97.6, it topped the previous 96.3 reading.
So, what is keeping the stock market from breaking out to new highs fueled by panic buying and what Alan Greenspan long ago called “irrational exuberance?” Well, the Wall Street buzz is that the political scenes in the U.S. and the European Union are creating just enough uncertainty to keep investors worried. We have a debt ceiling vote coming up in the U.S., and after all of the infighting over healthcare reform, we can probably bet that more political drama will be on the way in the U.S. All of the Russian intrigue in U.S. politics continues as well, and it involves both parties. It seems to become more and more confusing by the day, as lawmakers try to point fingers and make sense of the whole mess.
The great thing about the stock market, though, is that it has a tremendous ability to absorb and then become bored with certain political issues. This might explain that while both Democrats and Republicans are making a lot of noise right now, the major indices are still hovering near all-time highs. If these policy and scandal issues were going to affect the stock market, it would have already occurred. The move toward tax cuts and deregulation policies is back in motion, so maybe that will be the positive catalyst investors have been waiting for that would be the proverbial “green light” for stocks to head back to all-time highs.
What worries some bulls, however, is what the Federal Reserve might have up its sleeve with regard to interest rates. It continues to hint at two more interest rate hikes this year, and it has been so long since financial markets have had to deal with a rising interest rate market. This week’s upgrade to 2.1% GDP for the fourth quarter was taken as a plus from the previous 1.9%, but the weak GDP could be signaling that higher rates might actually help the economy. There is a growing consensus that banks are not lending because rates are so low. So the trade off for the Fed might be that higher rates might help the banks, but getting to that point could hurt the stock market and housing prices.
So the question is, do we want an elevated stock market and booming housing prices, or do we want interest rates back to a more “normal” level? This is a tough choice for the Fed and policymakers, mainly because higher rates and a booming stock market get along as well as cats and dogs. The odds favor the Fed waiting as long as possible before “normalizing” interest rates, which is good for the stock market, but might not be so great for banks, savers, and GDP. That is the investment scenario we face, so keep your seat belts fastened as we head into April and the rest of what is sure to be an interesting year for the stock market.
That said, the Gorilla wishes each and all a relaxing weekend as we head into spring and summer. The NCAA Final Four takes place today, and what a tournament it has been. The sad part of college basketball these days is having freshman go to the pros after one stellar year. It hurts their team, breaks their school’s hearts, and while money drives it, it still might not be the best road for a 19 or 20-year old. Best of luck in your brackets! We will be back in action on Monday, so again a wonderful weekend to all!
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