S&P 500 Index ends week above 1900

Experience taught me a few things. One is to listen to your gut, no matter how good something sounds on paper. The second is that you’re generally better off sticking with what you know. And the third is that sometimes your best investments are the ones you don’t make. – Donald Trump

Better than expected housing data released on Friday were just what stocks needed to propel the S&P 500 Index to an all-time high as it finally broke through and closed above the 1900 level. In recent weeks, the broad-based index has approached this psychologically important level only to succumb to selling pressure as investors became hesitant to buy stocks at or near record highs. Although volumes were light ahead of the Memorial Day holiday, economic data in the form of new and existing single-family home sales were encouraging, especially in light of recent data that caused concern about the strength of the housing recovery. New home sales rose to an annual rate of 433,000 in April and sales of homes in March were revised upward, increasing the average over the last 12 months to a healthy, more respectable number. Existing home sales also rose in April and recorded their first increase this year. With improved housing data, coupled with a better job market and a resurgent manufacturing sector, the foundation is being laid for stronger economic growth as the year progresses.  To be sure, economic data continues to be decidedly mixed as serious doubts still remain about the overall strength of the economy and its prospects for growth. But the stock market seems to be giving the economy the benefit of the doubt as it continues to climb a wall of worry on its reluctant trail in record-setting territory.

Last Week

As evidence of the conflicting economic data that has confused investors, weekly jobless claims rose to 326,000, a level that was higher than expected but within a range that indicates that companies are letting fewer workers go. Minutes from the most recent Federal Reserve meeting showed that members discussed interest rate hike plans but that the discussion didn’t necessarily mean that rate hikes are coming soon. They also felt that the weak GDP growth in the first quarter was “transitory”. In separate comments, Fed President Charles Prosser said that the U.S. economy is getting stronger and that interest rates may have to be raised sooner to stay ahead of inflation.

Friday’s record-setting close on the S&P 500 Index also might have been due in part to reassuring comments from Russian President Vladimir Putin as he stated that his country would respect the outcome of Ukraine’s presidential election held on Sunday.

For the week, the Dow Jones Industrial Average climbed 0.7% to close at 16,606 while the S&P 500 Index added 1.2% to close at 1,900, an all-time high. The Nasdaq Composite Index rose 2.3% to close at 4,185.

This Week

In this holiday-shortened week, there is little in the way of market-moving economic data as investors await the May employment report due to be released June 6^th. April durable goods orders are forecast to fall slightly after a strong March while the second reading of first-quarter GDP growth could also see a decline from the initial report. Consumer confidence and sentiment indicators for May should register slight increases while jobless claims should fall modestly as the labor market continues to show steady improvement. April personal income and consumption data will give important clues on the strength, or lack thereof, of GDP growth in the second quarter.

Earnings for retailers continue to be weak as Staples, Dick’s Sporting Goods, Home Depot and Target all missed analyst estimates last week, although Home Depot kept its full-year outlook in tact and Target posted higher than expected revenue. As the earnings season winds down, some of the more notable companies due to report this week include Toll Brothers, Sanderson Farms, Abercrombie & Fitch, Autozone and Costco Wholesale.

Portfolio Strategy

As stocks continue to confound skeptics on their rise to record-setting levels, many investors are forced to throw in the towel and jump onboard for fear that they will be left behind if the stock market marches higher. With money market funds yielding nothing and bonds yielding next to nothing as the 10-year Treasury hovers around 2.50%, maybe it’s becoming less of a difficult decision to invest in stocks, especially if economic growth accelerates and fundamentals improve. Even from a technician’s point of view, the stock market appears to be in an uptrend that still has legs. Dow Theory holds that there is a relationship between the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJTA). When one average climbs to a record high, the other one usually follows suit shortly thereafter. With both indexes showing remarkable strength of late trading above their 200-day moving average, this positive correlation between the two generally is a bullish sign. If transportation stocks were headed in the other direction, like Internet stocks, social media stocks, small cap stocks and biotech stocks in prior weeks, there would be real cause for concern. Right now the broad stock market seems to be marching to the tune of the transportation average and it likes what it hears.