It was a Star Spangled way to end the week, with the Dow surpassing the high-profile 17,000 level, and the odds are good that “The Dow” will be the talk of backyard barbecues this holiday weekend. There is just something American about bull markets, and hitting all-time highs is even more American. Bull markets tend to reflect all of the values that have made America great, and those, of course, include freedom, free enterprise, hard work, risk-taking, and economic growth. Bull markets are right up there with mom, apple pie and celebrating the Fourth of July. So that was why it was so fitting to have the Dow pass 17,000 and close at an all-time high this week.
Oh, and the five years of extraordinary help from the Federal Reserve, the Treasury, and the bailouts of the biggest banks did not hurt the Dow’s march higher either. The Dow and S&P 500 are at new highs, though, and the Nasdaq is at a 14-year high, so we will focus on the strengths of our great nation rather than wonder what role the Fed had in this feat. It was a great week for the bulls, though, and when the bell rang on Thursday, we had posted weekly gains of 1.3% for the Dow and the S&P 500, and a 2% weekly gain for the Nasdaq. It was fireworks all around as we headed into the long weekend.
What had the bulls singing and dancing this week were the stellar employment numbers from ADP and the government report that came out on Thursday before the bell. The government report showed 288,000 new jobs, which trounced the 215,000 that economists had expected, and the unemployment rate fell to 6.1%, versus the unchanged 6.3% rate that economists had predicted. Job growth had been the “monkey on the back” of this five-year old economic recovery, and it was one of those sectors that could just not get off the mat. The numbers this week suggest that job growth is back in a big way, which helps explain why investors are in such a celebratory mood.
While the Dow will get a lot of immediate attention, all eyes will soon focus on the S&P 500’s big benchmark of 2,000. The S&P 500 closed at 1,985 on Thursday, so we could see it cross the 2,000 level fairly soon. This would serve as yet another “trophy” in this impressive bull run we have witnessed since the S&P 500 bottomed at 666 in March of 2009. The Lehman collapse, the bursting of the housing bubble and the TARP bailout of the biggest banks now seem like old history. For years, the critics of the Fed had pointed to the “jobless recovery” as proof that the big bank bailouts, the near-zero interest rates and the massive purchase of Treasuries and toxic securities by the Fed were bad policies.
Five years into this recovery, the Bernanke critics are silent. Professor Bernanke had been a scholar of the Great Depression, and he had made it clear early on in the financial crisis of 2008-2009 that he would use the Fed and policy to avoid repeating the mistakes made during the Great Depression. He may have used some unconventional tools like TARP and Quantitative Easing, but as of this Fourth of July Weekend, the stock market is giving those policies a big thumbs up. The “jobless recovery” is morphing into the “long recovery that finally created jobs,” which is a big feather in the hat for Fed Head Bernanke.
Where the Fed’s four trillion dollar-plus balance sheet leads us is still unknown, though, and it is still a mystery as to what happens when the Fed unwinds the balance sheet that is full of Treasuries and “who-knows-what.” The perma-critics of Gentle Ben are still convinced that runaway inflation is right around the corner, but that inflation has simply not appeared. There was a big surge in commodity prices about three years ago, but that big rise reversed. The buzz back then was that commodities were signaling inflation, but somehow those prices fell and there was very minimal inflation.
History will sort that argument out, but for the time being, the stock market continues to rock. Jobs growth looks good, so the focus now will be on earnings season, which kicks off early this month. Will earnings support these all-time highs in stocks or will we see shortfalls that spook stocks? There is a growing chorus of strategists saying we could actually see double-digit earnings increases that top estimates, so that has some bulls chomping at the bit. Combine this week’s jobs numbers with a vibrant earnings season, and we could be off to the races.
We also must think of what happens when the “buzz” gets out to the general investing public that stocks are suddenly “the place to be.” Optimism levels are increasing, and that is not always a good sign. The bull market has been slow and steady, and it really has not received much mainstream attention at all over the past few years. Long-term bulls have loved this mellow atmosphere, where stocks slowly but surely moved higher and higher. If the market gets too hot, it will likely be obvious, but for the meantime, it is as comfortable as a Fourth of July day at the beach. Hats off to the Dow, and let’s hope the S&P 500 knocks out 2,000 on Monday.
The Gorilla loves the Fourth of July because he usually barbecues and watches the fireworks from the roof of his treehouse. Whether you are at the beach, the mountains, a pool party or just staying home for a long weekend, the Gorilla wishes each and all a Happy Fourth of July. We will be back in action on Monday, so in the meantime Happy Birthday to the United States of America. We have come a long way since 1776, and the future looks bright.
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