It was an exciting week for the stock market, especially after Wednesday’s 300-plus-point gain for the Dow that powered all three of the major indices to all-time highs. The upside move was impressive, but things settled down the rest of the week. Friday’s positive close kept the Dow Jones Industrial Average above the 21,000 level, which left the bullish camp in a good mood. For the week, the Dow rose 0.9%, the Nasdaq gained 0.4% and the S&P 500 lifted by 0.7%. We saw all-time highs on Wednesday, but instead of a blowout upside breakout on Thursday and Friday, we saw a calm and cool pullback that may have set the stage for higher highs.
Friday’s action was tempered a bit by Janet Yellen’s speech in which she made a very strong case for a rate hike at the Federal Reserve’s March 15th decision date. She stated that the Fed would “evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the Federal Funds rate would likely be appropriate.” Wow! She must have had a few lunches with Alan Greenspan lately, because that sort of statement is reminiscent of how Greenspan used to use “Fed Speak” to explain Fed policy. In the Greenspan Era, there was never a quick “yes” or “no” on interest rate policy, so Janet is getting used to her role.
Yellen said that the Fed was pleased with meeting its goals of strong employment levels and with keeping inflation around 2%, so that statement gives an “all clear” for a 25-basis-point rate hike on March 15th. By saying that the Fed has achieved its goals sort of takes it out of the picture for blame if the stock market loses its marbles once the rate hikes begin. We all know that Planet Janet has already made clear that we could see two or three rate hikes in 2017, and we also know that when the Fed starts a campaign of multiple rate hikes with the stock market at all-time highs, stocks tend to pull back. Late 1999 comes to mind, as does the peak we saw in March of 2000.
That is not to say that the Fed will blow apart this current upswing in stocks, but it is something to think about. Warren Buffett just last week said that the stock market is a great bet right now, but he also did say that higher interest rates could cause problems for stocks. This scenario is what puts some pressure on the Fed for its March 15th decision. Yellen seems on a path toward the “normalization” of interest rates, and with economists saying that there is a 90% chance of a March rate hike, it seems very likely to occur. The big plus to this scenario is how well banks and financials have been acting for the past few months, so maybe higher rates will keep the stock market moving higher.
There are some “wild cards” coming in the next few months that could affect the stock market, though, and the first is the mid-March challenge to Congress to increase the U.S. debt ceiling. There are also elections coming in Europe, and the “Brexit” mentality is spreading throughout the EU. Political chaos in the U.S. and the EU could easily rattle financial markets, but then again, the U.S. stock market is at an all-time high, and the U.S. economy remains strong. These “wild card” issues will likely play out without too much drama for financial markets, but they are worth monitoring for the rest of March.
Bulls are still waiting for concrete policies on tax cuts, deregulation and fiscal spending policies from the Trump Administration, and the buzz is that the sooner these issues can get approved, the better it will be for the economy. The stock market has already given its “seal of approval” for this shift in policy, so there are clear expectations in place. Bulls remain cautiously optimistic, and that could explain the slight pullback from the all-time highs we saw late this week. That said, the Gorilla wishes each and all a relaxing weekend. We had a great week, and the stock market seems poised for higher highs in the months ahead. We will be back in action on Monday. Again, have a great weekend as Spring is on the way!
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