State of the Stock Market Analysis for the Week Ending on July 22nd, 2018 Nasdaq Hits All-Time High Again, Earnings Season Underway 7-22-18)

All You Need Is Jobs

The week, the Dow was up 0.2%, the S&P 500 was up about 0.1%, and the Nasdaq was essentially flat. It was a good week in that stocks did not decline, despite a few bank earnings shortfalls, and the big disappointment from one of the biggest FANG stocks; Netflix (NFLX). The broader market held up well, though, which was a positive as we head toward Fall.

The other positive for the week was Fed Head Jerome Powell’s testimony before a few Congressional committees. He got great reviews from strategists, and he made it clear that he and his Fed would remain independent from politics and business interests and do what was best for the economy. This continues to be a historically independent Federal Reserve, and that is ultimately good for the broader economy.

Jerome Powell’s comments were well-received mainly because they did not come across politically in any way, shape or form. The concern among the investor class was that the Fed might raise rates two, three or even four times this year. The conventional wisdom now is that we might see just two rate hikes before the end of the year. The stock market has sort of “stalled out” for the time being, and until we see the rest of earnings season, it was great to hear Jerome Powell ease back on the interest rate hike campaign.

The Fed is working on that elusive “normalization” of interest rates, but it is a tough job. The near-zero interest rates that followed the housing meltdown from nearly ten years ago were supposed to be a temporary “solution,” but temporary solutions often last longer than investors expect. Whatever the Fed did back then worked well. Even “ground zero” real estate regions like Las Vegas have bounced back to new highs. Very few strategists could have predicted that sort of resilient bounce.

Jerome Powell and his Fed Heads know all too well that higher rates could derail this spectacular rally, especially in these secondary housing markets that went through a lot of troubles. There is that old saying of “if it’s not broken, don’t try to fix it,” and that might be the Fed’s goal for the rest of the year. Normalizing interest rates might help the broader economy and the financial industry, but the Fed likely does not want to torpedo the housing market, which could happen if longer-term rates rise too quickly.

Having the Federal Reserve keeping a low profile right now is helping the stock market in a big way. It gives investors one less thing to worry about. The DC drama continues, and it is nice for investors not to have to worry about the Federal Reserve and interest rates. Powell made it clear this week that rates will continue to rise unless we see economic weakness. That is a good trade-off, and it is a plus for a stock market that is looking for a reason to break out to new highs.

We have a big slug of earnings next week, and that includes many of the “mega-techs.” There is some concern following Netflix’s shortfall this past week, but analysts are generally upbeat. That said, the Gorilla wishes each and all a relaxing July weekend. We will be back in action on Monday, so stay tuned!

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