The week played out on Friday with the same tune that it followed all week. Bulls were looking for a big win to close out the week, but instead we saw another flat close that again was at or near the recent highs for the major indices. It was fine and dandy with the bulls, who are still enjoying the late-October rally. However, flat is still flat, as we closed with weekly gains of 0.4% for the Dow and the S&P 500, and a 1.2% weekly rise for the Nasdaq. We did see new all-time and 14-year highs this week for the major indices, but bulls would have preferred a more robust lift to close out the week above those newly-reached levels.
It was encouraging to see strong consumer sentiment numbers on Friday, as the University of Michigan sentiment report increased from October’s 86.9 to the current 89.4. That topped economist estimates for November of 88, and it marked the highest levels for consumer sentiment since the summer of 2007. Likewise, we saw retail sales for October increase 0.3% versus the 0.2% economists had expected. So again, it is great to see vibrance in the consumer arena. Consumers lagged during the six-year recovery, and with them finally on board, it is yet another plus for the U.S. economy.
The question now is just which way the U.S. recovery is heading. Falling oil and commodity prices are still in play, despite Friday’s price rise in those sectors, and as good as these falling commodity prices are, they bring about new worries. Yes, they help consumers at the pump, and they show that inflation is nowhere in sight, but if these prices fall too far and too fast, other concerns arise. The global GDP pessimists are quick to note that sinking oil prices might actually be signaling a global economic slowdown in demand rather than an oil glut of supply. Low oil prices are usually welcomed, but if they fall too much, then it is anyone’s guess as to what that means for global GDP.
As oil keeps falling, the U.S. dollar keeps rising, and it hit a seven-year high against the yen this week, as well as a two-year high against the euro. Again, this is a positive for U.S. travelers and domestic buyers of imports, but it can squeeze profits of the many U.S. multinationals that depend on foreign sales and operations for profits. Falling oil and other commodity prices also suggest that a wave of deflation might be breaking out all over the world, and that is not the atmosphere a shaky global economy needs right now as it continues to recover from the 2008 financial meltdown and the subsequent recession that followed.
The U.S. stock market went into a tizzy in the first half of October following fears of a global GDP slowdown. It looked “touch and go” through October 15th, but then St. Louis Fed President James Bullard gave that infamous speech that suggested the Federal Reserve might “reconsider” terminating the end of its QE3 bond purchases at the end of October. Bullard’s speech worked wonders, and the stock market launched into an amazing 10% rally that brought us back to the market highs we are now enjoying. Thanks to Bullard and Janet Yellen the rest of the Fed did not have to lift a finger at its October meeting, since Bullard’s comments worked well enough to pump up stocks and eliminate most of the “falling global GDP” fears.
It was especially interesting on Friday to hear that same James Bullard back in his hawkish posture, saying that the Fed really might need to raise interest rates sooner rather than later. The buzz is that the Fed will raise rates in mid- to late-2015, so having Bullard commenting to the contrary on his mid-October quotes shows that the Fed might not be as comfortable with the 10% rally as we thought it was. This might explain why the stock market is acting so “non-committal” to any new upside breakouts to more robust highs. Stock market records are nice, but when they come day after day on the backs of such small gains, they lack the resounding upside confidence the bullish camp would prefer to see.
We are through October and well into November, though, and this time of year is historically strong for the stock market. Earnings season is over, and the economic news due out is fairly light. We get inflation numbers next week from both the PPI and CPI reports, and we also get the Fed minutes from October’s meeting on Wednesday. This should offer some clues as to just what the Fed is thinking, so all eyes and ears will be on what the Fed said aside from its press release during its October meeting. The minutes should offer more insight into “if” and “when” the Fed might begin raising interest rates, so Fed watchers will be on the edge of their seats until Wednesday.
Global shocks are temporarily on hold, and it was a big relief for the bulls to not have to react to any big, new, global surprises during the past week. These are the “wild cards” that no one usually expects, so having no new shocks was a great way to spend what was pretty much a calm and cool week for the stock market. That said, the Gorilla wishes each and all a wonderful and relaxing weekend. Thanksgiving is right around the corner, and yes, the Gorilla will be forwarding his famous Banana Stuffing recipe for your Thanksgiving enjoyment. Again, a happy weekend to all, and we will be back in action on Monday!