Bulls were pleased to see the Dow Jones Industrial Average hit another all-time high on Friday, but not having the Nasdaq and S&P 500 join the all-time-high party was a summer bummer. It was a solid week overall in terms of earnings, but the major indices finished with mixed weekly gains. The Dow was up 1.2% for the week, while the Nasdaq was down 0.4% and the S&P 500 was up 0.2%. Apple (AAPL) was the talk of the town this past week, but some strategists are raising concerns about traditional metrics of “breadth and depth” for an aging bull market that is hovering and holding at all-time highs.
The government jobs report we saw yesterday showed 209,000 new jobs for July, which topped estimates of 175,000. It helped create Friday’s upbeat action, but it was just not that great of a “hard number” that many bulls had wanted to see. Friday’s report was down from June’s 231,000, though, and it once again suggests that the economy might not be as strong as the stock market is signaling. Pundits tout that last week’s 2.6% GDP is a good showing, but last week’s second quarter GDP did fall short of estimates of 2.8%.
So how can the stock market be at all-time highs with all of these lackluster “real” economic numbers? That is the grand question right now, and it is a tough question. The highs we are seeing are nothing like we saw during the Tech Bubble of 1999-2000. As we remember Alan Greenspan’s comments about “irrational exuberance,” our current market does not yet seem unhinged. It might be elevated, but it seems rational and well-priced as long as the economy is strong enough to produce earnings.
What has surprised most investors is the fact that the upward trend in the stock market has come without any progress in Washington DC to push through tax cuts, deregulation or promises of infrastructure spending. These were the issues and policies that supposedly started this rally early in the year. With all of the political distraction, not much has been legislated so maybe it might be best for the stock market to have nothing get done in Washington. That is cynical, but it still has bulls scratching their collective heads as to why dysfunction in DC leads to all-time highs for the stock market.
This puts Janet Yellen and the Fed in a tough spot. In the sense that the Fed wants to raise interest rates one or two more times this year to “normalize” them, why rock the boat? We have stocks at all-time highs, and too many rate hikes might not be all that smart for the Fed if it craters the stock market. This theme will play out for the rest of this year, and it will be interesting to see if President Trump reappoints Janet Yellen in January when her tenure is up for reappointment.
We are heading into the lazy days of summer, and the stock market is usually calm and cool. We should get a good vibe as we head into the rest of August, so stay tuned. With Washington DC on vacation, and with earnings season playing out, we should get some input from Warren Buffett’s “Mister Market” in the weeks ahead. The Gorilla wishes each and all a relaxing August weekend, and we will be back in action on Monday!
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