Stocks close at record highs on Greece deal

I’m having a hard time finding things to buy, if that says anything about the market. If I find something tomorrow to buy, I don’t give a thought as to whether the market is going up or down. I just barrel in. – Warren Buffett

An agreement between Greece and the Euro-zone finance ministers regarding its massive debt was just what the markets needed last week to propel both the Dow Jones Industrial Average and the S&P 500 Index to record highs. After teetering back and forth all week long on fears that a deal would not be reached, the markets surged on Friday on news that Greece would be granted a four-week extension of its bailout package. The agreement is conditional upon Greece submitting detailed plans next week on steps it will take to reform its budget and get its fiscal house in order. While investors were relieved that a deal had been reached, the reality of the accord is that it merely buys Greece more time and kicks the proverbial can down the road to be dealt with at a later date. There did seem to be a strong sense, however, that a long-term solution would be found that would keep Greece in the euro zone. Almost as important as the Greek deal last week was positive economic data from the euro zone that showed growth is improving and deflation is less of a concern. The February purchasing managers’ index in the euro zone increased from the previous month and business sentiment has improved in both Germany and France. In the U.S., economic data last week was mixed while minutes from the January meeting of the Federal Reserve suggested that Fed officials favor keeping interest rates near zero for a longer time. A majority felt that a premature rate hike would do more harm than good to the fragile recovery by possibly sending the economy back into a recession. Modest inflation, a strong dollar, the Greek crisis and other geopolitical risks were all factors cited by the Fed as being influential in a decision that could eventually raise rates. For these reasons, it looks more and more like the much-anticipated June rate hike will be postponed to the fall or even later.

Last Week

In a relatively quiet week, the economic data was decidedly mixed. Due to the significant drop in energy prices, the producer price index (PPI) fell 0.8% in January. Although the home-builder sentiment index fell to its lowest level in five months, it still is at levels consistent with a modest, ongoing recovery in the housing sector. As expected, construction of new homes dropped 2% in January after a strong December, but industrial production rose only slightly and less than had been expected. Leading economic indicators nudged higher in January but were weaker than anticipated as momentum slowed in residential construction and manufacturing orders were disappointing.

Jobless claims declined by 21,000 to 283,000 last week as layoffs remain low and the pace of hiring remains strong. In 2014, the U.S. economy added the most jobs in 15 years and this positive employment trend should continue.

For the week, the Dow Jones Industrial Average rose 0.7% to close at 18,140 while the S&P 500 Index added 0.6% to close at 2,110. The Nasdaq Composite Index gained 1.3% to close at 4,955, only 45 points from 5,000, a level that was last seen in March 2000.

This Week

The featured attraction this week promises to be Federal Reserve Chair Janet Yellen as she will provide testimony on monetary policy before a Senate committee and a House panel. Investors will be paying close attention to her remarks for any clues about the timing of an interest rate hike.

In economic news, the consumer price index (CPI) for January is expected to fall 0.6% as a result of declining oil and gas prices. Both January existing and new home sales should match last month’s results and confirm a modest housing recovery. Gross domestic product (GDP) for the fourth quarter will likely be revised lower to 2.1% from 2.6% but durable goods orders should rebound in January after a poor December.

Retailers will dominate the earnings reports this week as Home Depot, Lowe’s, Macy’s, Target, Kohl’s, the Gap and TJX Co. are all expected to report. Other notable companies on the earnings docket are Hewlett-Packard, Express Scripts and Berkshire Hathaway.

Portfolio Strategy

Last week’s release of the minutes from the most recent Federal Reserve Open Market Committee meeting cast new light on the Fed’s stance with respect to interest-rate increases. The consensus view among pundits had been that June was the most likely month for the Federal Reserve to raise interest rates from near-zero levels. All that changed in the minutes with comments by Fed officials that they are in no hurry to hike rates, especially given the fragile state of the economy. While the employment picture has brightened considerably since the Fed’s bond-buying program began, inflation has remained stubbornly low and below the Fed’s target of 2%. Even GDP growth has slowed markedly from the torrid pace of 5% during the third quarter of 2014. Weak economies in Europe, plunging oil prices and a strong dollar have all contributed to keep inflation in check and inflation expectations low. The yield on the 10-year Treasury has also reflected the economic weakness in Europe as well as the uncertainty hanging over Greece. After ending the year at 2.17%, the 10-year Treasury yield has spent much of the year below 2% before recovering to end last week at 2.14%. Yields on comparable European government bonds are substantially lower, making Treasury bonds even more attractive. As long as inflation expectations remain below the Fed’s 2% target, it’s difficult to make a case for the Federal Reserve rate-setting committee to raise interest rates. All eyes and ears will be on Janet Yellen this week as investors hope to receive clarity from the Fed on its monetary policy and the timing and magnitude of an interest rate hike.