Hopes were high for a strong finish to what actually turned out to be a pretty good week for the stock market. While we were higher in midday action on Friday, some late-afternoon selling kicked in and left the major indices marginally lower for the day. It was a solid week, though, and when the closing bell rang on Friday afternoon, the major indices had booked weekly gains of 3.8% for the Dow, 2.4% for the Nasdaq and 3.0% for the S&P 500. For 2015, all three of the major indices are pretty much flat. The S&P 500 finished out 2014 at 2,058, and it closed on Friday at 2,055 (now that’s flat!). It has been a fairly volatile year, but bulls are pleased to see us at least holding on to all of last year’s gains so far this year.
Friday got off to a positive start thanks to a nice-looking employment report, which showed 257,000 new jobs were created in January. While that was down from December’s 329,000, Friday’s release topped estimates of 230,000. The unemployment rate did rise a bit to 5.7%, from last month’s 5.6%, and it ran counter to the decline to 5.5% that economists had expected. The general feeling was that the jobs number could give the Fed one more reason to begin raising interest rates back to a more “normal” level, especially since the current rates near zero have been in place since just after the financial meltdown of 2008.
The problem with “normalizing” rates is that it has been more than six years since we have had any rate hikes. We also have had a booming bull market for more than six years, so it is quite clear that there is a huge correlation between the two. The Fed is in a tough spot right now, because as much as its zero interest rate policy seems to have helped, there are still an awful lot of storm clouds on the horizon. Likewise, the Fed and central banks around the world have done so much pumping, priming, printing and QE, that we can only wonder what will happen when the music finally stops (or what will happen when the Fed begins RAISING rates).
As for the storm clouds, there are numerous possible “global shocks” that come to mind. The first has been and still is the price of oil. The six-month price plunge appears to have bottomed out, and oil has solidly rallied back. Oil rose about 7% this past week, and that has allayed many of the fears of what might happen if oil fell to $40 or even $30 per barrel. A lot of damage has already been done, though, with the precipitous fall in oil prices. The U.S. oil shale boom has been hit very hard, and big layoffs, rig closings and large cutbacks in capital expenditures have really put a lid on the American oil boom of the past few years. Oil has rallied for now, but then again, there is no guarantee that higher prices will remain in place.
Another storm cloud is obviously Greece. The new leftist government is pushing for changes that could possibly lead to Greece breaking from the EU. Greece has a ten-day deadline to submit a request for an extension to keep EU backing in place, and coincidentally enough, on Friday afternoon, Standard and Poor’s lowered its long-term rating on Greece to B-minus, from B. The ten-day deadline for Greece falls on Monday, February 16th, and in an interesting twist, the Friday before the deadline just so happens to be a Friday the 13th. Let’s hope the Greeks and the EU can figure out something before next Friday, because few bulls want to see a pending EU crisis coincide with a Friday the 13th!
There are still a host of other worries that include the Russia/Ukraine tensions, increasing and spreading ISIS violence, a possible economic slowdown in China, and the Big Enchilada of all; a possible GDP slowdown. Worries about falling global GDP came into the picture in a big way in early October of last year, and we saw a fast meltdown of roughly 10% in the S&P 500 by mid-October. It took some very “QE” sounding comments from the Fed’s James Bullard to launch the S&P 500 into a roughly 10% subsequent rally, and subsequent Fed officials have stepped in with comments on nearly every big selloff since then. You have to wonder what would happen if a Fed Head finally made a big comment, and the market suddenly FELL.
That is a worry for another week, though, and the bulls were just happy to have a positive week like the one we just had. Granted, we did see some weakness in various economic reports this week, but we also saw a few positives that sort of balanced the week out. Earnings have been good, but not great, but again, the stock market did manage to rise. The yield on the 10-year Treasury rose from about 1.65% on Monday, to 1.93% on Friday. This at least showed that money was not seeking “safe haven” hiding places, and was instead possibly heading back into the stock market.
With the Greek deadline looming on February 16th, next week could be a bit more tense than this week was. We all know the usual EU response, though, and as we have said before, it usually includes a couple big press releases, a big speech, and a big “fix it plan” that merely “kicks the can down the road” to be dealt with in another month or so. Whatever happens, it should be an interesting week. That said, the Gorilla wishes each and all a restful and relaxing weekend. We are already in February, and spring is right around the corner. Again, have a great weekend and we will be back in action on Monday!