Stocks at all-time highs on positive economic data

People don’t like the idea of thinking long-term. Many are desperately seeking short-term answers because they have money problems to be solved today. – Robert Kiyosaki, American investor, businessman and self-help finance author

Mostly positive economic data released last week provided the catalyst for stocks as both the Dow Jones Industrial Average and the S&P 500 Index rose over 1% to close at all-time highs. In fact, the DJIA is now within a mere 75 points of 17,000 while the S&P 500 is just 50 points shy of 2,000. What will corral this charging bull is anybody’s guess but as long as the economy keeps improving, there seems to be life in this old bull yet. Among the upbeat economic data last week, the much-anticipated employment report for May was in line with estimates as 217,000 jobs were created and the unemployment rate remained unchanged at 6.3%. In 2014, the average number of new jobs created per month has now been about 215,000 and the unemployment rate remains at a six-year low. Though jobless claims rose slightly last week, their four-week average is at the lowest level since June 2007. In addition to an improving labor market, data reported by the Institute for Supply Management (ISM) on both the manufacturing and service sectors showed strong growth and provided more reasons to be optimistic about the economy. Throw in higher than expected April factory orders and automobile sales in May near an eight-year high and it is no wonder that stocks continue to surprise on the upside.

Last Week

While the employment data last week was encouraging, the fact that wages remain stagnant is a concern, as only healthy wage growth will provide the fuel to increase consumer spending, which accounts for almost two-thirds of total GDP. The trade deficit also widened in April to the highest level in two years as imports hit a record high, possibly leading to slower growth in the second quarter.

Stocks also benefited last week from news that the European Central Bank (ECB) reduced interest rates and announced other measures to boost bank lending in order to stimulate economic growth. The interest rate on bank deposits with the central bank was lowered to minus 0.1%, in effect charging commercial banks for keeping money with the ECB.

For the week, the Dow Jones Industrial Average rose 1.2% to close at 16,924 while the S&P 500 Index gained 1.3% to close at 1,949. The Nasdaq Composite Index jumped 2.0% to close at 4,321.

This Week

This week will be a letdown for investors that thrive on economic data as the calendar is very light. Retail sales are expected to show a healthy increase as automobile and truck sales remain strong. Most economists expect the producer price index (PPI) to rise only modestly as inflation remains well under control. The University of Michigan consumer sentiment index is expected to increase slightly and should reflect more optimism and confidence among consumers about the current and future state of the U.S. economy.

In overseas news, China is expected to release a number of economic reports for May that will provide important insights into the strength of their economy. The Bank of Japan meets and will likely leave its monetary policy unchanged.

The earnings calendar is even lighter than the economic calendar this week as only a handful of companies are due to report, including Pep Boys, H&R Block and Casey’s General Stores.

Portfolio Strategy

As the stock market continues to make record highs each week, there are several reasons for this strength in stock prices that should be noted. From all indications, it appears that the economy has recovered from a weather-induced coma in the first quarter as strong economic growth of 3% is forecast for the second quarter. Also, the correction that occurred in so-called momentum stocks, such as biotechnology, Internet and social media, was confined to these sectors and did not spread to the rest of the market. Many stocks in these sectors have since recovered some of their losses. Low interest rates have been a contributing factor as well as central banks worldwide continue to be very accommodative. The ECB proved that again last week with a further reduction in rates. Tensions between the Ukraine and Russia have also eased considerably and any geopolitical risk to markets has been greatly reduced. While there have been several bearish warnings from prominent technicians and hedge fund managers, no corrections or crashes have occurred and the market continues to be very resilient as investors buy the dips. When no one knows what the catalyst would be for a market correction or when one will occur, it is very painful for investors to be on the sidelines as the market continually makes new highs.