State of the Stock Market Analysis for the Week Ending May 3, 2014 (Strengthening Economy 5-3-14)Strengthening Economy and Interest Rate Hikes

Stocks edged lower Friday, but they somehow ended higher for the week, as we saw the Dow rise about 1%. The Nasdaq was up 1.2%, while the S&P 500 gained about 1% as well. It was not a bad week at all, although the strong employment numbers could weigh on the stock market in the near term. The seemingly strong employment numbers give the Federal Reserve a “green light” to keep tapering, but the bigger concern is that the strengthening economy could lead to interest rate hikes.

In the past, the gigantic worry was that “The Fed” would raise interest rates in a strengthening economy. That is not the case anymore, as “Quantitative Easing” became the norm. The Fed spent billions buying our own debt over the past several years, and that became the norm. The pulling back of that sort of bond-buying now seems “normal,” but it offers some new challenges to say the least. Instead of worrying about interest rate hikes, the market is now more worried about tapering. Hats off to Bernanke for changing the debate.

The jobs report we saw this week was impressive with 288,000 new jobs created. It topped the 215,000 number that economists had expected, and it also topped last month’s 192,000. This is a big number since it showed that something is working in the U.S. economy, despite the many negatives we keep seeing. The unemployment rate fell to a lower-than-expected rate of 6.3%, so again, it was another positive for the U.S. economy. Stocks did not rally big, though, but they held up well for the week.

The strange thing about these soaring employment numbers is how tame inflation and interest rates remain. The yield on the 10-year Treasury is at 2.59%, and with the economy seeming to be firing on all cylinders, we might have thought we would have seen interest rates edging higher. They are not heading higher, though, which is a piece in the economic puzzle that is difficult to decipher. Strong employment gives a “thumbs up” for higher interest rates, but that is something we are just not seeing with this strengthening economy.

We are heading toward summer, and that is often an extremely bullish time. The numbers are there in terms of the economy, and earnings this quarter have been decent enough to support further market upside. While the numbers we have seen are good, but not great, they do seem solid enough to keep this five year-old bull market alive and kicking longer. We have a supportive Fed, and that looks likely to last for the next couple of years, so that helps the bullish case into 2015.

The problems in Russia and Ukraine are serious, but they do not seem big enough to unravel global stock and bond markets. It was a concern over the past few weeks, but it has simply not occurred. It could spin out of control, but Mr. Putin seems in no hurry to create chaos in Central Europe. That is a good development for global markets, and it is a good development for global peace, calmness and security. Peace is good for strengthening economies and stock markets, so let’s hope that prevails in Ukraine.

The key for the U.S. stock market is for the Fed to remain cooperative and for interest rates to remain low. The Fed seems in no hurry to raise rates, and that is bullish. Even with the improving economy and employment numbers, the Fed seems in absolutely no hurry to raise interest rates. That is a big relief to bulls, and it makes things all the more bullish for the stock market. That said, the Gorilla wishes each and all a fabulous and relaxing spring weekend. We will see you next week!

The Gorilla recently watched an amazing video clip of a baby gorilla mimicking a little girl. The Gorilla was very proud of the baby gorilla’s intelligence. Hopefully he won’t take this Gorilla’s job when he grows up!

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