I think you have to learn that there’s a company behind every stock and there’s only one real reason why stocks go up. Companies go from doing poorly to doing well or small companies grow to large companies. – Peter Lynch
After knocking on the door for several weeks, the S&P 500 Index finally broke through the seemingly important technical level of 1,850 last week and proceeded to hit an all-time closing high of 1,859 on Friday. But explaining what caused investors to be so bullish in propelling stocks higher is a bit more complicated. For the most part, economic data for the week again was a mixed bag as the severe winter weather continued to make it difficult to assess the true health of the economy. In fact, an asterisk should probably be placed by each economic report indicating that the data may not be reliable due to harsh winter conditions. Even Janet Yellen in her testimony before the Senate Banking Committee acknowledged that the economic data for the past six weeks had been surprisingly weak, possibly as a result of winter’s icy grip on the nation and its refusal to let go. Speculation arose that maybe there would be a pause in the taper due to this weakness. But, instead, she calmly reiterated that the Federal Reserve’s stimulus reduction program will continue on course and that the federal funds rate will likely remain near zero until sometime in 2015. And even though the unemployment rate nears 6.5%, she cautioned that the labor market is still relatively weak and does not accurately reflect this number. It was this conciliatory tone and accommodative stance that ultimately convinced investors that one should not fight the Fed, despite the fact that much of the economic data recently has left much to be desired.
To say that economic data is painting an unclear picture of the U.S. economy is an understatement. On the negative side last week, the preliminary services sector purchasing managers index fell while U.S. jobless claims rose, indicating that the labor market recovery is slowing. In addition, durable goods orders also fell in January, making it the third month in the last four in which orders have fallen. To make matters worse, revised 4th quarter GDP growth was slashed to 2.4% from 3.2% as consumer spending was less than first reported.
On the positive side, U.S. single-family home prices rose slightly more than expected in December and a 20 city composite home price index registered healthy gains for the year. New home sales also jumped about 10% in January and reached the highest level since July 2008. Lastly, the February Chicago Purchasing Manager’s Index rose to almost 60, an indication that manufacturing activity continues to expand at a healthy clip.
For the week, the Dow Jones Industrial Average climbed 1.4% to close at 16,321 while the S&P 500 Index jumped 1.3% to close at 1,859, a new record closing high. The Nasdaq Composite Index also increased 1% to close at 4,308.
The first economic report due out this week is the February ISM manufacturing index, which is expected to show that the manufacturing sector continues to expand at a modest pace. While there are several other pieces of economic data on the calendar, none is more important than the February employment report due out on Friday. Expectations are for the unemployment rate to remain unchanged at 6.6% while private sector and non-farm payrolls are forecast to rise by about 150,000. Weather again may be a factor in skewing the report, as was the case in the two previous months that saw far fewer jobs created than originally thought.
With Russian troops now present in the Ukraine’s Crimea region and tensions rising over Ukraine’s sovereignty, anticipate some volatility in the stock market near term until the situation is resolved.
With more than 90% of the companies in the S&P 500 Index having already reported their quarterly profits, the earnings season is definitely winding down. Among those companies reporting this week include Bob Evans Farms, PETsMART, Costco Wholesale, Staples and Kroger.
After starting the year in the red and enduring a 5% correction, the S&P 500 Index rose over 4% in February and has now risen about 1% for the year. Stocks of small and mid-cap companies have performed even better. The market will be tested this week with the crisis in Ukraine and the employment report giving investors plenty to be concerned about. Rising tensions between Russia and Ukraine will likely cause some weakness in stock prices as investors sell risky assets for the safety of bonds and cash. As in other conflicts that involve geopolitical risks, though, it’s best for investors to remain calm and not make any rash decisions with regard to their portfolios. In times like these, the benefits of diversification become readily apparent as fixed income investments, commodities and cash provide relative safety and stability. The employment report on Friday will also be important for investors as they attempt to gauge the strength of the economy. There is certainly a lot riding on this report in the wake of the previous two, both of which were disappointing. Sooner or later, the number of new jobs created will have to be in the 150,000 to 200,000 range or investors will begin to question the strength of the economy and the ability of corporations to grow their earnings.