Bulls were disappointed to see April close on such a sour note, but at least May began with an impressive rally that put to rest many of the worries that characterized the past week. It was definitely a tough week, and on most investors’ minds was the lackluster 0.2% GDP number we saw on Wednesday. Economists were looking for a 1.1% growth rate, but the actual number seemed more like one from a recession than from an improving and robust economy that has had all of the backing and effort from the Federal Reserve (and global central banks) for more than six years.
The Fed’s comments on Wednesday did little to reinvigorate optimism on Wall Street, and the only real plus that came out of the meeting is that the Fed is in no rush to raise interest rates anytime soon. Normally, the thought of no rate hikes for a long time would have given stocks a big bounce. That was not the case this week, and if anything, investors began to wonder if the 0.2% GDP number might be a sign of rough waters ahead for the U.S. economy. Friday’s bounced erased some of the pain, but the major indices still finished with weekly losses of 0.3% for the Dow, 0.4% for the S&P 500 and 1.7% for the Nasdaq.
It was a mixed bag for both earnings and economic news this week. The strong dollar has hurt earnings among the big multi-nationals, and that was just one of the hardballs thrown at the stock market. Economic news continues to be mixed as well, and for every report that tops estimates, there is another one that somehow falls short of expectations. We did see weekly jobless claims fall to a fifteen-year low, but there were enough weak economic numbers to keep bulls scratching their heads and wondering if we might actually be heading toward a contraction (i.e. recession) in the broader economy.
It is one thing to have the Fed make it fairly clear that it is mothballing any plans to raise rates anytime soon, but it is a whole other problem to have an economy that suddenly looks as though it is out of steam. The other “wild card” is the fact that the Fed has had rates at or near zero for more than six years, and if we were to move into recession mode, the question is raised of what is the Fed to do? Does this open the door for more QE programs, or does the Fed just “bite the bullet” and let the economy (and the stock market) fend for itself?
That is a tough question, especially because the Fed and central banks around the world have consistently and predictably “thrown the kitchen sink” at each and every economic crisis that has come our way since the Lehman collapse of 2008, and the subsequent bursting of the housing bubble. The Fed gets great marks for creativity since the Lehman days, but what happens if we were to enter another period of shakiness and trouble? Ben Bernanke is long gone (and he just got a third post-Fed job as a Senior Advisor at PIMCO), so we will not have Gentle Ben to turn to if things fall apart.
It has been said that all new Fed Chairmen get “tested by fire,” and Janet Yellen has not had to face much so far that comes even close to a “crisis” in her tenure thus far. She and the Fed seem to be doing a good job so far, but again, we have gone quite a long time without any big economic meltdowns or global shocks. The Fed has been doing a great job in the post-Bernanke era, but the trailing off in first quarter GDP is cause for concern. Stocks, shrugged off all of those worries on Friday, though, and they did so just as they have been doing for the past six years.
From a technical perspective, the S&P 500 did what it had to do on Friday. It closed out Thursday’s swoon right on top of its 50-day moving average, and it bounced nicely. Its 50-day moving average is currently 2,087, and it was a big relief to the bullish camp to see that level hold on Thursday and springboard back from that level on Friday. The S&P 500’s 50-day moving average has come into play several times since February, and each time, the S&P 500 has rallied back, even during those occasions when it dipped below that closely watched level.
Next week has its host of challenges, and all eyes will be on next Friday’s employment report, as well as the rest of earnings season. Economy watchers will be looking for numbers that might suggest that first quarter GDP was just an aberration, rather than a sign of a fizzling economy. It should be a telling week for the stock market, so stay tuned. The Gorilla wishes each and all a relaxing May weekend, and it is amazing that we are already closing in on summer. We will be back in action on Monday, so again, have a great weekend!
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