State of the Stock Market Analysis for the Week Ending July 17th, 2016 (Week Ends On A Mixed, Yet Positive NoteĀ 7-17-16) All You Need Is Jobs

We did set record highs for the Dow and the S&P 500 on Friday, but the stock market ran out of upside steam and finished the day flat and mixed, with the Dow higher and the S&P 500 and the Nasdaq slightly lower. It was an impressive week just the same, with weekly gains of 2% for the Dow and 1.5% for both the S&P 500 and the Nasdaq. Decent earnings from the banking and financial arena seemed to help stocks finish the week with a mixed, yet positive note, and the bullish camp remains optimistic for the coming week.

The “good news” of the week was seeing the Bank of England NOT cut interest rates from 50-basis points to 25-basis points on Thursday. All of the drama and fear about Britain’s Brexit vote has settled down, and the “exit” vote obviously is not unraveling the British stock market, which has had a nice post-Brexit bounce. The conventional wisdom is, perhaps, that the EU might need Britain more than Britain needs the EU. Britain’s new Prime Minister Theresa May is already forming a cabinet, and this is all taking place sooner than many EU watchers had expected.

Terrorism and madness reared their ugly heads this week, and there was even a possible coup in Turkey on Friday, but the financial markets seemed to hold their composure. That does nothing to erase the tragedies that seem to happen on an almost weekly basis, but it does show that the financial markets are somehow not panicking as a result of these horrible events. That economic and investing term of the “New Normal” (courtesy of Bill Gross a few years back) is getting thrown around in the media about terrorism, but oddly enough, financial markets are not reacting.

We saw some mixed economic news on Friday in the U.S., as retail sales rose by 0.5% in June versus the expected 0.1% rise. At the same time, we saw consumer confidence for July drop to 89.5 versus June’s 93.5, and the expected 92.5 number. Consumers are key right now, so the mixed batch of strong retail sales and waning consumer confidence contradicted themselves. This might explain why the stock market finished mixed and flat on Friday, after the fallout from the tragedy in Nice, France and the conflict in Turkey.

So where does the stock market go from this current, high-level juncture? Some strategists say it will only go higher because there are no “yields” anywhere else. Former PIMCO bond chief Bill Gross has made it clear that $12 trillion in global government bonds yield zero to negative interest rates. Investing in any 10-year government bond that promises to earn you almost nothing for ten years or more might feel “safe,” but you would almost be safer burying cash in your yard or keeping that cash in your mattress. No wonder why a 2% or 3% yield in a solid stock looks so good right now!

Then there are the central banks that have taken us to what many economists and strategists call a very “unnatural” economic state. Critics of the ZIRP (zero interest rate policies) and even NIRP (negative interest rate policies) are saying that we are in unchartered territory. Zero interest rates may have bailed us out of the post-2008 meltdown, but as Ben Bernanke said, it was supposed to be a “temporary solution” to avoid a repeat of The Great Depression. Bernanke is long gone, and it now falls upon central banks (including the Fed), to return things to a more “normal” footing.

You can only imagine what happens to bonds yielding ZERO if and when the Fed or other central banks even START to raise interest rates. It would also possibly wallop global stock markets IF rates are raised or start to rise on their own. This is one of those strange moments in history where it feels great to have a stock market at all-time highs, but at the same time, it seems as though a lot of things could go wrong. We can always count on central banks to move slowly and cautiously, so maybe that is yet another extremely bullish sign for the stock market. We shall see, but the Fed and global central banks will likely avoid anything that might “rock the boat.”

That said, keep in mind that the Dow and S&P 500 are at all-time highs, and the vibe in the market is quite bullish. We did not see a boisterous week-ending rally to the upside, but it was still a pretty good week for equities. The Gorilla wishes each and all a relaxing July weekend, and a little calm and quiet might be good as we await two Presidential conventions. Summers used to be calm and quiet, but this summer has been different. Either way, we will be back in action on Monday, ready for a challenging summer. Again, have a great weekend!

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