Bulls were looking for a Friday bounce, and that was how the day began following Thursday’s selloff. Oil prices rallied by more than 6% on Friday, which took some of the worries about a global GDP slowdown off the table. The stock market lost that early upward steam, though, and a late-day fade still left all three of the major indices positive for the day. However, the overall gains were lackluster. It had been a rollercoaster week for stocks, but when the closing bell rang, we were left with weekly losses of 1.2% for the Dow and the S&P 500 and a 1.3% slide in the tech-heavy Nasdaq.
So what is keeping the recent post-February rally in a holding pattern? Well, Janet Yellen had an extraordinary meeting and interview with former Fed Chairmen Alan Greenspan, Ben Bernanke and Paul Volcker Thursday night, and this meeting of the minds did not offer many new insights into the current difficulties that the economy faces. Yellen stressed that “gradual rate hikes” were still on the chalkboard for the Fed this year, but then again, she also emphasized that the U.S was not a “Bubble” economy.
You have to give her credit, though, because there was no way she would point her finger at the infamous “Tech Bubble” of the late-1990s or the “Housing Bubble” as signs of a “Bubble” economy for the U.S. Alan Greenspan’s famous quote before he passed the torch to Ben Bernanke was that the housing market was showing “regional froth,” but “no bubble.” We all know how the housing market collapse soon followed the Lehman collapse in 2008, but it was interesting to hear Janet go on record saying that we are not a bubble economy.
Yellen obviously has not seen “The Big Short,” the Academy Award-winning movie that not only explained the housing bubble and wrongdoings by the biggest banks but also made very clear that nearly NO ONE was prosecuted or held accountable for a popped bubble that nearly brought down world financial markets. The stock market bottomed with the S&P 500 at 666 in early March of 2009, and the moves by the central banks of the world that we have seen since that perilous time have been, and continue to be, astounding.
Rates were lowered to zero, and Quantitative Easing (QE) become a global phenomenon that continues to this day. Financial markets bounced back, and the stock market is holding its own. Granted there have been a few bumps and bruises along the way, but the S&P 500 is holding its own above 2,000 seven years after its bear market low. The economy, however, is still struggling with sub-2% growth in the U.S., and the global economy is also showing lackluster performance. All of those efforts by central banks worked, but with negative interest rates spreading throughout Europe and Japan, you have to wonder if this is healthy.
We also have a crucial earnings season underway, and we get the real kickoff next week with Alcoa (AA). Earnings have been declining over the past few quarters, and as much as analysts lower estimates, the fact remains that earnings are decelerating. This could be why the stock market has gone flat and is looking fairly tired. Will the Fed come to the rescue with more QE and lower rates? Probably if the atmosphere gets tough, but rates are essentially zero even with the Fed’s 25 basis point rate hike in December. The ECB faces negative bond yields in several countries, as does Japan, so what does a central bank do if the economic picture worsens from here?
The buzz is that central banks are out of bullets, and worse yet, they are losing the confidence of markets and investors. That was why it was disturbing to hear Janet Yellen staying on the path toward “gradual” interest rate hikes Thursday night rather than offering more clear insight as to why global growth is stagnant, and the U.S. economy is growing by only about 1.4% right now. This scenario sets us up for a challenging summer for the stock market mainly because the drivers of earnings and growth do not seem to be responding that well to all of the efforts of the Federal Reserve and central banks around the world.
It was not all that bad of a week for the stock market, though, and that was a plus. Economic news continues to come in mixed, but at least oil prices are not collapsing anymore. Earnings are key, but keep in mind that the numbers that will be broadcast in the next few weeks are amid dramatically lowered expectations. That said, the Gorilla wishes each and all a relaxing April weekend, that just so happens to be a great one for golf. Jordan Spieth and Rory McIlroy will be going head-to-head, and with Spieth in the lead for the Masters, it promises to give us some very exciting golf. We will be back in action on Monday, so again, have a great weekend!
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