State of the Stock Market Analysis for the Week Ending on January 21, 2018 Positive Week for Stock Market Despite Government Shutdown 1-21-18)

All You Need Is Jobs

Despite a disappointing fourth-quarter GDP number, the stock market remained in overdrive on Friday, as all three of the major indices moved to all-time highs. Estimates for the fourth quarter GDP were for a 3.0% increase, and that was down from the previous 3.2% reading. The 2.6% number was disappointing, but the stock market rose just the same. Having stocks rally on bad news is actually sort of bullish, and investors are scratching their heads about why weak economic numbers might be good for the equity markets. Higher highs are always welcomed, but this month’s rise is a conundrum..

The conundrum is that the Federal Reserve has a “green light” to raise interest rates, especially since the stock market is rising day after day, to all-time highs. A weak showing in Friday’s GDP number, however, throws a wrench into the idea that the Fed can “normalize” rates in the months ahead. Our current scenario of a booming stock market puts the Federal Reserve in a tough spot. Does it raise rates to cool down the stock market, or does it raise rates against the backdrop of a weakening economy? The odds are for no rate hikes in the months ahead, and that is likely why the stock market rallied on the bad economic GDP news.

Janet Yellen is leaving the Fed soon, and Jerome Powell will be at the helm of the Fed. They say that new Federal Reserve leaders often face challenges immediately, and Powell might have his hands full. It is tough to take over a Fed that pushed interest rates down to near zero almost ten years ago to bail the economy and the stock market out, following the 2008 collapse. The near-zero rates worked, but the process created many imbalances that we are still experiencing nearly a decade later. The stock market is giving a huge “thumbs up,” but we are seeing longer-term rates quietly heading higher.

The yield on the 10-year U.S. Treasury closed on Friday at 2.66%, and as we have stated, DoubleLine chief Jeff Gundlach had been very worried about the yield rising above 2.63%. Long rates are tied to mortgages and business loans, so a rise in long-term rates could take a toll on the real estate market and the broader economy. This move in long rates is independent from the Fed’s control over short-term rates, and that is the challenge for the Federal Reserve in the months ahead. Strategists have been thinking about what could stall our bull market, and interest rates are key right now.

Another possible problem for the stock market is the growing animosity and anger toward the “mega-tech” world. The FAANG stocks have been incredible stock performers for years, but they have become so big that they could face what Microsoft (MSFT) faced in 1999-2000. Antitrust litigation toward Mr. Softie helped add to the panic that caused the 2000 meltdown in tech stocks. Yes, the bubble was in play, but there was that antitrust mentality toward MSFT that made it clear that no one company would be allowed to get too big. MSFT crashed with the rest of tech in 2000, but it is amazing that MSFT closed Friday at an all-time high above $94 per share.

The Microsoft story is interesting because it could be what awaits Amazon (AMZN) and the “mega-techs.” When the government shines the light on big companies, bad things seem to happen. Bill Gates created an amazing company, and it is mind-boggling to see it acting as a hot tech stock nearly eighteen years later. Likewise, seeing Intel (INTC) up 10% on Friday alone was amazing. Intel is not close to its all-time high from 2000, but its Friday gain was impressive. Good companies remain good companies, even if it takes a long time for their stocks to recover from big market declines.

That said, the Gorilla wishes each and all a relaxing final weekend of January. This has been an historically strong rally for stocks, and this sort of January rise is rare. January sets a tone for the year, and bulls would love to see the rally continue. We all know, however, wild cards and curveballs appear out of nowhere. It has been a bullish month, though, and enjoy the weekend. We will be back in action on Monday, and let’s hope this aging bull market still has some upside energy.

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