S&P 500 closes at all-time high on positive overseas news

Investing means putting your money on something that has a good chance of winning in the short to medium term, and an even better, if not dead-certain, chance of winning in the long term. – Paul Clitheroe, Australian financial advisor and author

The stock market continued its winning ways last week as the S&P 500 closed at a record high on positive overseas developments, higher oil prices and better than expected earnings reports. After spending most of the year in the red, the broad market finally broke through and closed above its previous all-time high set back on December 29^th. Small company stocks, which underperformed their large cap counterparts last year, also participated in the rally and posted the best weekly results. Partly responsible for the strength in stock prices was the belief that an agreement between the European Union and Greece would eventually be reached to resolve the Greek debt situation. The tone of the negotiations seems constructive as both sides realize what is at stake and are open-minded about reaching a solution. In other geopolitical news, Russia and Ukraine announced a cease-fire agreement that will calm fears of a broader conflict and hopefully lead to a lasting peace between the two countries. Even the economic news in Europe was brighter as Germany, the region’s economic powerhouse, posted much better than expected gross domestic product (GDP) growth in the fourth quarter. While economies in most of the euro zone continue to stagnate, this could be a positive sign that growth is just around the corner. The rise in oil prices also contributed to the bullish sentiment last week as dual fears about weak oil demand and weak global growth were temporarily put to rest. Although everyone acknowledges an oversupply of oil, a price move back above $50 a barrel may indicate that demand is stronger than first thought, a positive sign for economic growth. Stocks also received a boost from quarterly earnings reports last week as Coca Cola, PepsiCo and Cisco Systems all beat analyst’s estimates. While not spectacular, this earnings season has been better than expected considering that results in the energy sector have been weak and overall earnings expectations had been reduced. 

Last Week

There were only a few economic reports released last week and the news was not encouraging. U.S. core retail sales, which exclude automobiles, gasoline, building materials and food services, rose only 0.1% in January and less than what was widely expected. The headline number was actually lower by 0.8% due to weak gasoline receipts and a big drop in auto sales. Lower gasoline prices should boost consumer spending in coming months, though, and lead to stronger retail sales. Jobless claims also rose last week by 25,000 to 304,000 but the underlying trend still suggests a strengthening labor market.

As European Central Bank (ECB) President Mario Draghi has proclaimed in the past to do “whatever it takes” to bolster the European economy, the Greek government also promised to do “whatever we can” to reach an agreement with its creditors.

For the week, the Dow Jones Industrial Average added 1.1% to close at 18,019 while the S&P 500 Index gained 2% to close at 2,096. The Nasdaq Composite Index rose 3.2% to close at 4,893. The Russell 2000 Index of small cap stocks climbed 1.5%.

This Week

Both the stock and bond markets are closed on Monday for President’s Day and the calendar for economic data is relatively sparse for the remainder of the week. January housing starts are expected to drop modestly from the previous month but still remain at a high level. The producer price index (PPI) for January is forecast to decline by 0.5% due to plunging oil prices. Although leading economic indicators for January are predicted to fall slightly from December, they should point to a still moderately growing economy. Finally, the Federal Reserve will release minutes from its January meeting.

Almost 80% of the companies in the S&P 500 Index have announced their earnings results and the fourth quarter earnings season is winding down. Among the most prominent companies scheduled to report this week include Devon Energy, Duke Energy, Deere & Co., Waste Management, Wal Mart Stores, Nordstrom, Medtronic, Newmont Mining and Fluor.

Portfolio Strategy

The $1.14 trillion quantitative-easing program implemented by the European Central Bank (ECB) to help stimulate the moribund economies in the euro zone seems to have changed the sentiment with regard to European equities. Designed to spur economic growth and ward off any possible deflationary trends, it is hoped that this massive bond-buying program will accomplish the same results as the U.S. and put Europe’s economy back on the road to recovery. Last week’s positive geopolitical news between Russia and Ukraine and hopes for a solution to Greece’s debt situation only served to increase that optimism. With Germany’s economy showing some life, it could be just a matter of time before other European economies begin to grow. Certainly a weak euro will provide a tailwind for companies that export their goods as their products will be much more competitive in world markets. Since early 2008, European equities have significantly underperformed U.S. equities as earnings per share have fallen drastically by comparison over the same time period. As most analysts have reduced S&P 500 earnings growth for this year, it’s possible that European companies could grow their earnings by 10% or more. This could be the first year in a long time that European equities outperform global equity markets. With this possibility in mind, investors would be wise to have a broad-based international fund in their portfolios with a heavy dose of European equity exposure.