Do not buy the hype from Wall Street and the press that stocks always go up. There are long periods when stocks do nothing and other investments are better. – Jim Rogers
Records are made to be broken and after breaking through technical resistance at the 1,850 level on the S&P 500 Index, this broad-based index continued its upward climb last week to set yet another record high. Heading into last week, there were two major obstacles that the market faced that could have caused stock prices to weaken. The first one involved rising tensions between Russia and Ukraine with the presence of Russian troops in the Crimean region, which caused stocks to sell off on Monday. But the following day saw Russian President Vladimir Putin order his troops back to their military bases and stocks surged on the news. Although the geopolitical risk in the region has not been totally diffused and will likely remain for some time, it appears that cooler heads have prevailed and any possible military conflict avoided for now. The other obstacle facing the market was the employment report released on Friday. With the prior two months’ job numbers much worse than expected, investors were bracing for another disappointing report, especially given the harsh winter weather that has played havoc with much of the recent economic data. To almost everyone’s surprise, though, the government announced that the U.S. economy had added 175,000 new jobs, better than economists had expected. Although the unemployment rate ticked up to 6.7%, it did so only because more people entered the labor force in search of a job. This favorable jobs report, coupled with the fact that weekly jobless claims also dropped, caused investors to breathe a sigh of relief and send stocks higher.
In addition to the upbeat employment report, the Institute for Supply Management Index (ISM) of U.S. manufacturing was also better than expected and showed that the sector continues to expand. While the same index that measures the activity of service-sector companies dropped slightly in January, it, too, showed a sector that was still expanding. And outplacement firm Challenger, Gray & Christmas announced that planned layoffs by companies fell in the month of February.
The impact of online retailing on sales was felt last week by two major retailers as Staples announced that it plans to close 225 stores to reduce costs while RadioShack plans to close 1,100 underperforming stores. Two of the largest supermarket chains, Albertson’s and Safeway, agreed to merge in a deal valued at over $9 billion that will result in more than 2,400 stores.
For the week, the Dow Jones Industrial Average rose 0.8% to close at 16,452 while the S&P 500 Index climbed 1% to close at 1,878, a new record closing high. The Nasdaq Composite Index edged up 0.65% to close at 4,336.
The economic calendar is relatively light this week and investors will be more focused on the Federal Reserve Open Market Committee meeting on March 18 and 19 to get a better read on Fed policy and the economy. That being said, retail sales are due to be released on Thursday and are expected to rise a modest 0.2%, with the severe winter weather cited as a reason for the weak number. Wholesale prices as measured by the producer price index (PPI) should only increase by 0.2%, indicating once again that inflation remains benign.
With the earnings season almost over, the week will be dominated by retailers as Urban Outfitters, American Eagle Outfitters, Dicks Sporting Goods, Williams-Sonoma, Men’s Wearhouse and Aeropostale are all expected to announce their profit reports.
With the S&P 500 Index perched at record highs, it was just five years ago on March 9th that this benchmark index stood at bear market lows as it reached a level of 666 during the financial crisis and Great Recession. Since that time, the S&P 500 has risen about 180% in a bull market that is now five years old, which by historical standards is a long time. There are signs that the bull is getting tired and may be due for a rest. Retail investors are pouring money into stock mutual funds as they fear being left behind as the market continues to go higher. Surveys also show very little bearishness among investors as complacency has set in and fundamentals in terms of soft economic numbers are being ignored or blamed on the weather. Margin debt has also risen to record levels as investors take advantage of low interest rates. While these factors may be a sign of a market top, the market is certainly not overvalued as corporate earnings have been strong, the economy is expected to get stronger and the Federal Reserve continues to be accommodative. There also is still plenty of cash on the sidelines and interest rates and inflation remain low. This tug of war between bulls and bears should continue over the near term and lead to greater volatility. At the moment, the momentum seems to be with the bulls, but investors should be cautious as this bull market begins its sixth year.