After the bungee-jumping action we had in October that showed a roughly 10% decline and a subsequent 11% gain in the S&P 500, the first week of November felt rather dull. The U.S. election tipped in favor of the Republicans in a big way, but it really did not have that much of an effect on the stock market. Likewise, Friday’s employment numbers showing 214,000 new jobs versus the expected 243,000 had little effect on the stock market either. We closed out the week mixed and flat on Friday, and only slightly higher for the week with the Dow up 1%, the S&P 500 up 0.7% and the Nasdaq unchanged.
With regard to Tuesday’s election, political strategists have chimed in that Republicans should not get too gleeful over the big victory since it was more a repudiation of President Obama and Congress of the past six years than a crowning of some “great new ideas” to fix the nation. The gains by Republicans in both the Senate and the House all but guarantee that the stalemate, gridlock and mean spiritedness in DC will continue (and even increase) straight into the 2016 election, when the presidency is up for grabs. It seems the more things change, the more they stay the same.
The economy is still improving, though, and there is no getting around the fact that the major indices touched all-time highs this week. The Nasdaq hit a new 14-year high, so it is looking just as strong as the Dow and the S&P 500, and with the major indices at these levels, you would think that the economy is in overdrive. It is a good economy, but not a great economy, and oddly enough, this is probably a plus for the stock market. The Federal Reserve is under absolutely no pressure to “cool things off,” and if anything, the worries about global GDP weakness and deflation are right back in our faces.
With November here, the buzz among market strategists has been that we could see a solid 5% to 10% run in the S&P 500 into the New Year, but there are clearly some “wild cards” out there that could spoil that big party. News Friday of Russian tanks, cannons and troops moving into Ukraine was wild card number one, and it was probably no coincidence that the move did not happen until AFTER the U.S. elections. President Obama had been fairly critical of Russian moves in Ukraine over the past couple of years, and with the walloping Democrats received in the election and the loss of the Senate, Obama may lay a whole lot lower with regard to Ukraine. The advantage right now has definitely shifted to Putin.
Another wild card is the ongoing fall in commodities. The mysterious 25% decline in the price of oil since June has positive and negative ramifications. It is fabulous for U.S. consumers at the pump, but it has also sent the U.S. dollar soaring. Falling gold and silver prices are also interesting in that despite all of the stimulus by Central Banks around the world, the specter of deflation is increasing. Were we to experience another “global shock” like the Lehman meltdown of 2008, the U.S. Fed lacks any “real” tools to use since it already has short rates at or near zero. This seems to be part of the reason the Fed keeps talking about “normalization” or raising interest rates sometime in 2015. It has resisted raising rates so far, but the Fed knows that is has to somehow eventually get back to a more “normal” footing.
Janet Yellen spoke in Paris on Friday about how the Fed wants to remain “transparent” and not do anything to “surprise” global financial markets with changes in Fed policy. We are in new territory here on “Planet Janet,” and keep in mind that she is the top Fed Head, who gets to negotiate whatever fallout we eventually see from six years of QE and Fed policies that have never been tried before. Ben Bernanke has sailed off into the sunset (and is making $200,000 per speech), and while he avoided another Great Depression, history will tell whether all of the bailouts and programs were really the right thing to do. Best of luck to Ms. Yellen, who has been quite lucky in her first year as Fed Chairman.
Bulls are not too worried, though, because they have grown so accustomed to seeing the Fed, the ECB and even the Bank of Japan step in and save the day every time the big ball of yarn seems ready to unravel. The October plunge and subsequent bounce seemed almost as though someone or SOMETHING decided that a 10% market correction needed to happen, but that it could not be allowed to turn into a good, old-fashioned 20% bear market (or worse). Whatever happened worked well. We bounced back to new highs in a blink, and amazingly enough, the American Association of Individual Investors is showing that investor confidence is hitting new highs and pessimism is falling to new lows (that is historically a bearish signal).
It is November, though, and optimism is clearly back in vogue in the stock market. The October roller coaster came and went so quickly that most of the investing public barely noticed it. October closed strong, and all of the monthly statements that come in the mail shortly will look good, which actually could help fuel investor optimism into the New Year. Bulls are hoping that a Thanksgiving Rally, a Santa Claus Rally, a Year-End Rally, and the January Effect are waiting in the wings. Let’s hope so. On that bullish note, the Gorilla wishes each and all a wonderful restful weekend, and we will be back in action on Monday.
By the way, there is a great new Rolling Stone article by Matt Taibbi on the JP Morgan Chase shenanigans during and after the mortgage market meltdown. It is a great weekend read, and here is the link:
Again, have a great weekend!