Let's start at the very beginningA very good place to start When you read you begin with A-B-C When you sing you begin with do-re-mi
- The Sound of Music (1959, music by Richard Rodgers, lyrics by Oscar Hammerstein II)
Investors used to think that starting at the very beginning meant examining corporate earnings. After all, buying stock in a company (or through a stock mutual fund) is a bet that the company will increase its ability to earn money over time. Yet there is ample proof that companies are having a harder time making money by selling more goods and services and have instead been relying more on cost containment and financial engineering to meet their earnings objectives.
S&P 500 corporate profits are expected to rise 2.9 percent in Q1 vs. a year earlier, according to analysts polled by Thomson Reuters, which would be a slowdown from 5.4 percent in Q1 and 6.2 percent in Q4. But those diminished earnings are coming on projected revenue growth of only 1.6 percent. “If companies are having a harder time making money, then why is the stock market rising?” asked a caller to my radio show recently. The answer to that question requires that we start at another beginning…or with Ben Bernanke.
In January, I jotted down 7 reasons why the stock market rally could extend well into 2013:
(1) (2) (3) The Federal Reserve is maintaining its low interest-rate policies (including the monthly purchase of $85 billion worth of bonds) until employment improves substantially
(4) Japanese officials have started to address the country’s multi-decade economic stagnation
(5) Europe is no longer on the precipice of disaster
(6) The much-feared hard landing in China never came to fruition
(7) U.S. housing is finally contributing to economic growth
You get the joke…Ben Bernanke’s Federal Reserve is responsible for the lion’s share of the stock market move. Without easy monetary policy in place, all of the other factors would not have boosted stocks to the levels that we are seeing now. Last September, the Fed launched its current round of bond buying (QE3) and also said that it would maintain low short-term interest rates until mid-2015. The announcement and the subsequent December pledge to keep the program open-ended sparked a rally in global equities.
Everything was honky dory until May 22nd, when during Congressional testimony, Bernanke raised the prospect that the central bank could downshift from its accommodative policies, if economic data were to improve. The subsequent 7½ weeks were volatile for every asset class, with most (bonds, gold, emerging stocks) heading lower. The exception has been the U.S. stock market -- the S&P 500 and Dow Jones Industrial Average tumbled about 7 percent from their intraday record highs in June, before recouping all of those losses and recording a new nominal closing high by the close of trading on Friday.
If the boomerang stock market started its journey with Bernanke’s comments, it makes sense that markets would return home after another Bernanke speech. In it, the Chairman underscored that the central bank would continue to pursue highly accommodative policies for the “foreseeable future,” due to a weak labor market and low inflation. This time, investors took Bernanke at his word.
This week’s key event puts Ben Bernanke back on the hot seat for his semi-annual testimony to the House on Wednesday and to the Senate on Thursday. It is expected that the Chairman will draw a distinction between tapering bond buying, which is likely to begin at either the September or December Fed meeting, if all goes well in the economy; and raising interest rates, which is not likely to occur until 2015. Bernanke and company will have a lot more data to chew on between now and the September 17-18 FOMC meeting, including two more employment reports.
Markets: The risk-on trade was ON…at least for another week. For the 25th time this year, the Dow closed at an all-time closing record. The S&P 500 hit its 19th record close of the year, and the NASDAQ hit its highest closing price since September 2000.
- DJIA: 15,464, up 2.2% on week, up 18% on year (Inflation adjusted high: 15,731)
- S&P 500: 1680, up 3% on week, up 17.8% on year (Inflation adjusted high: 2036)
- NASDAQ: 3600, up 3.5% on week, up 19.2% on year (All-time closing high 5,048 on 3/10/00)
- 10-Year Treasury yield: 2.59% (from 2.72% a week ago)
- Aug Crude Oil: $105.95, up 2.6% on week
- Aug Gold: $1277.60, up 5.4% on week
- AAA Nat'l average price for gallon of regular Gas: $3.58 (up $0.11 in a week)
THE WEEK AHEAD: Bernanke’s testimony and earnings season will dominate. Readings on Retail Sales are likely to show an increase, due to a spike in energy prices and consumer inflation at the core level should remain tame.
The trial of former Goldman Sachs employee Fabrice “Fab” Tourre begins. He is charged with misleading investors in a mortgage deal begins
8:30 Retail Sales
8:30 Empire State Manufacturing Survey
10:00 Business Inventories
Goldman Sachs, Coca-Cola, Yahoo
9:15 Industrial Production
10:00 Housing Market Index
American Express, Bank of America, BNY/Mellon, eBay, IBM, Intel
8:30 Housing Starts
10:00 Ben Bernanke testifies before House
2:00 Fed Beige Book
Capital One, Google, Morgan Stanley, Verizon, Microsoft
8:30 Weekly Jobless Claims
10:00 Ben Bernanke testifies before Senate
10:00 Philadelphia Fed Survey
10:00 Leading Indicators
GE, Honeywell, Schlumberger