State of the Stock Market Analysis for the Week Ending February 12th, 2017 (Market Finds Direction With End of the Week Boost 2-12-17)
Investors had been frustrated for the past few weeks, as the major indices traded flat, quiet and mixed while the stock market looked for direction. This week looked as though we would see more of the same, with Monday, Tuesday and Wednesday showing that same calm and quiet action, but the mood changed with Thursday’s big lift. The upside move continued into Friday, and we saw all three of the major indices hit all-time highs to wrap up what was a pretty good week for stocks. For the week, the Dow Jones Industrial Average was up 1.0%, the Nasdaq gained 1.2% and the S&P 500 added a respectable 0.8% gain. The post-election rally has the Dow and Nasdaq up about 11% and the S&P 500 up about 8% since November 8th.
That’s a solid run for a stock market that was in a bit of a free fall all the way through Election Eve, and the question now is whether Friday’s upside breakout will have legs into the rest of February and the rest of 2017. The “Trump Bump,” as it has been called, surprised most strategists and investors, and amazingly enough, the financial sector led the way higher. The buzz was that rising interest rates in terms of the 10-year U.S. Treasury would actually give banks and financials a boost, and that was exactly what fueled the rally in financials over the past three months. Long rates have eased a bit, as have prices among the financials, but with the 10-year holding at 2.41%, we could see some renewed strength in the banking sector.
Politics were center stage again this week, and as the Trump Administration completed its 15th business day in operation, it is clear that investors do not seem overly worried. Late night comedians and talk shows are having a great time parodying what seems like each and every member of the new Trump team, but for all the divisiveness we are seeing in “real” politics, there is clearly a bull market in political comedy! Having a renewed bull market in stocks is also a plus, mainly because it means that there is confidence in whatever changes might be on the horizon. Wall Street seems particularly keen on tax reform and deregulation, so those issues might be helping give the stock market its current boost.
The Federal Reserve is currently a “non-issue” despite its hints at three rate hikes this year, as well as more to follow in coming years. Janet Yellen said recently that the Fed wanted to see real growth instead of just “optimism,” and oddly enough, we saw a small dip in “optimism” on Friday. Consumer sentiment actually fell in February to 95.7 versus the expected 98.0 reading and the previous 98.5, which shows that even consumers are pulling back a tad on optimism. Economic news remains mixed, and inflation is non-existent, so it will be tough for the Federal Reserve to make a case for a rate hike anytime before summer at the earliest. Maybe the Fed might even decide to wait until Fall for another rate hike.
Another quarter-point rate hike might not affect a rising stock market, and again, we all know that the banks and financials would welcome any sort of higher rates. Banks and insurance companies have been squeezed hard by near zero rates for almost nine years, as have CD and money market investors, so maybe the end of zero interest rate policies (ZIRP) will “normalize” the economy back into higher growth rates. The fourth-quarter 1.9% GDP number is still on investors’ minds, and anything that would rev GDP up might be good for both the economy and the stock market as we head into the rest of 2017.
As for the new administration’s trade policies, the “America First” theme is still in play. Donald Trump had Japanese Prime Minister Shinzo Abe in D.C. Friday for a welcome ceremony and lunch, and the two are off to Trump’s Mar-a-Lago resort tomorrow for a round of golf. Trump has said he wants “fair” and “free” trade, so we will wait and see what four or five hours of golf in Palm Beach can do for Japanese-U.S. relations. It will also be interesting to see if they report who actually wins the golf match! Imagine a side bet on a long put on the 16th where Trump says, “Hey, Shinzo, we’ll cut the Toyota tariff if you make this one, and if you miss it you have to build three new auto plants in the U.S.” Oh, to be a caddie tomorrow at Mar-a-Lago!”
That said, the Gorilla wishes each and all a relaxing winter weekend, and for the bullish camp, it will be a very relaxing weekend with the three major indices having hit new highs this week. We have a lot of economic news out next week, as well as the ongoing earnings parade, so have a great break from the stock market. We will be back in action on Monday, and we will see if this current lift can breakout higher in a big way. Volume was fairly light on both Thursday and Friday, so a big volume upswing would be exactly what the bulls would want to see. Again, have a great weekend, and stay tuned!
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