If an investor had been off in New Zealand or Fiji for the last six months and had not been paying attention to the stock market at all, coming back to the headlines in the U.S. right now would rattle him or her. News of the U.S. leaving the Paris climate deal, the controversies about Russian election hacking in the past election, and all of the calls for investigations, subpoenas, and private counsel investigations in DC would have been a big surprise. A “rational” investor would probably think that the stock market might be down by 20%-30%. That same investor might say, “what a mess,” and that “I should have stayed on vacation.”
A strange thing has occurred, though, as we saw all three of the major indices hit all-time highs on Friday, and for the week, the Dow was up 0.6%, the Nasdaq gained 1.5%, and the S&P 500 tacked on a solid 1.0%. It was a pretty good week for the stock market despite all of the global and domestic political worries, and that says a lot about a stock market that just keeps slowly and steadily ratcheting higher. Yes, there are funky signs of bubbly froth, but for the most part, there are few signs of “euphoria” or even Alan Greenspan’s old tagline of “irrational exuberance.”
The government jobs report on Friday was very disappointing as we saw just 138,000 new jobs for May, which was below estimates of 185,000. Economists revised April’s number down from 211,000 to 174,000, so we were even quite a bit lower than the downward revision of last month. There was a lot of optimism following the ADP private sector jobs report for May, but Friday’s government number was a dud. The unemployment rate did drop to 4.3%, from the expected 4.4%, so we did get a little bit of good news despite the government’s jobs number.
The employment picture is still solid, but it just seems to fall short every other month. Likewise, we continue to get disappointing GDP news, and that makes for a conundrum as to how stock prices can continue to edge higher. The 10-year U.S. Treasury yield even dipped to 2.16% on Friday, meaning that bonds are doing great as yields fall. How can long rates be falling when the Federal Reserve has made it clear that it plans to continue to raise short-term rates? There has been talk of the “Goldilocks Economy” coming back into vogue, in that it is not too hot, nor is it all that cold either. This puts the Fed in a good place to gradually raise rates, so a June hike seems like a done deal.
There could come a point, however, that after two or three rate hikes down the road, the stock market might finally get spooked. That seems like a scenario that the Fed would want to avoid as long as possible, but it could come into play if the stock market turned into a “euphoric” bull market instead of the slow and plodding bull market we have seen since the November election. The Fed has a bad history of trying to reign in excessive market speculation, and we only need to look back to 1999-2000 as a point when Fed rate hikes helped in popping the tech bubble of that period. We are nowhere near that sort of madness, but the broader market is historically expensive right now.
Janet Yellen and the Fed have made it very clear that they will monitor economic data (translation: the stock market!) in the months ahead, and as Fed Head James Bullard said following the mid-May meltdown, the Fed will step in if there is trouble. Bullard hinted at more QE or even rate cuts if we hit some bumps in the road, and that statement helped rally stocks back from that day in which the Dow fell nearly 400 points. In the past, there was the “Greenspan put,” the “Bernanke put,” and there is clearly a “Yellen put” in place now. This is helping keep investors confident, and there are definitely no bulls complaining.
That said, we are off to a great start for June, and this puts us in a good position for potentially higher highs as we head into summer. There used to be quiet summer doldrums in the stock market, but with our highly connected world, summers can sometimes be as volatile as the the autumn seasons. The Gorilla wishes each and all a relaxing first weekend of June, and we will be back in action on Monday. We have a great NBA rematch in motion between Golden State and Cleveland, and that should make for an exciting series. So enjoy, and again, a relaxing weekend to all!
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