State of the Stock Market Analysis for the Week Ending February 19th, 2017 (Investors Remain Optimistic 2-19-17)
Friday started off slow for the stock market, and the bulls were hoping for a late-day lift that would close out the week on a positive note. That is what happened, and the stock market ended with the major indices at all-time closing highs. It was a great week, overall, with the Dow Jones Industrial Average and the Nasdaq notching 1.8% gains for the week, and the S&P 500 rising 1.5%. Janet Yellen gave a good performance on Capitol Hill this past week, and regardless of what the Federal Reserve decides on interest rates in March, investors remain in a very optimistic mood. There are no signs of “euphoria,” in the stock market, and that is what had bulls smiling as we headed into this long President’s Day weekend.
Janet Yellen’s comments this past week were very reassuring for investors. We all know that the Fed had hinted at three rate hikes in 2017, and yet, Yellen said that any rate hikes would be “gradual.” The translation of her comments is that the Fed will not do anything to rock the economic boat unless it sees inflation or an overheating economy. Neither scenario is likely to play out anytime soon, and if anything, an over-heating stock market seems more likely of a scenario that could cause the Fed to raise rates sooner rather than later. The stock market is in a good mood right now, so we can probably count on no rate hikes until summer.
On Friday, we saw the Index of Leading Economic Indicators (LEI) rise 0.6% in January, which was up from December’s 0.5% rise. As we have stated, this is a forward-looking index, and it suggests that the economy is doing quite well right now. Earnings season has been solid, consumers are confident, and spending and housing are also doing well. The stock market is continuing to reflect these positive developments, so investors are asking “what could possibly go wrong?” The Volatility Index (VIX) did spike a bit this past week, but for the most part, fear levels among investors remain low. The VIX finished out the week below 12, so we are seeing very little concern among the investor class.
Politics and the new Trump Administration are still a big concern, but the ongoing transition seems to be working out smoothly enough to keep the stock market acting well. It has also provided Saturday Night Live and late-night talk shows with loads of new material, and that is fair game. Investors seem to be optimistic about possible tax reforms, deregulation, and infrastructure spending, so whatever happens in the coming months is being given a “thumbs up” from the stock market. New policies and shifts in government can rattle financial markets, but it is refreshing to see markets remaining calm and cool during this new administration.
So does this positive environment give the Federal Reserve a “green light” for a March rate hike? It probably does, and with the stock market doing so well, we would not likely see a panic. If anything, having short-term interest rates return to more “normal” levels might be a huge plus for the economy. Critics of the zero interest rates policies (ZIRP) have said that near-zero rates distorted the economy for nearly a decade, and they have said higher interest rate levels were long overdue. Banks and financials have performed very well as we move toward higher interest rates, so we will wait and see if the “normalization” of interest rates benefits the economy and the stock market.
It was a great week for investors, and it is nice to have had the stock market finish the week with a win. This puts the stock market in a unique position as we head into the rest of 2017 in that it is rising, but it is still a long way away from being a runaway bull market. Cautious and quiet is always preferred to reckless and loud. New highs are always welcomed for the major indices, and this was a particularly good week. The Gorilla wishes each and all a relaxing President’s Day Weekend, and we will be back in action on Tuesday!
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