It is official. We made a new high this week and the markets appeared to be in “melt-up” mode. So why is everyone cautious?
After almost two months of consolidation, the equity markets broke out once again, spurred by the knowledge that if the economy falters, the Fed remains ready to reverse course. Yet, by Friday afternoon, the bears were fighting hard to ruin the party.
It was no accident, in my opinion, that Fed Chairwoman Janet Yellen’s testimony before a Senate panel on Thursday was followed by a record-breaking gain in the S&P 500 Index. But by Friday afternoon, the benchmark index was barely holding its gains .True, not all the indexes have reached new highs. Dow Theorists won’t feel comfortable until both the industrials and the transports also break out and confirm the gains in the other indexes.
Yellen, in her testimony, said that the central bank was studying the economic data closely. She said “a number of data releases have pointed to softer spending than many analysts had expected. Part of that softness may reflect adverse weather conditions, but at this point, it’s difficult to discern exactly how much. In the weeks and months ahead, my colleagues and I will be attentive to signals that indicate whether the recovery is progressing in line with our earlier expectations.”
This is a departure from her upbeat comments over the last few weeks when she appeared more positive over the future prospects of the economy. So why did the markets go up? I believe investors assume that if the economy were to slow further, the Fed would reverse its recent tapering and some argue that the Fed might even inject more stimulus into the economy.
Readers may recall that I have been expecting to see a spate of disappointing numbers in the weeks ahead as the country continues to suffer from the impact of the Polar Vortex. Today’s GDP data, for example, indicated the economy in the fourth quarter dropped to 2.4% versus 4.1% reported in the third quarter. Lower exports and consumer spending were the main culprits in the sluggish number.
My own belief is that once the country thaws out from this winter’s deep freeze, activity will once again spurt higher. However, between now and then, the stock market may get spooked by fears that the economy is rolling over.
As for events overseas, specifically in the Ukraine, the markets have been able to absorb events without too much difficulty. Naturally, when tensions rise between Mother Russia and the U.S., one must pay attention to events. Vladimir Putin seems bound and determined to escalate the situation further but hopefully cooler heads will prevail.
There has been so much talk this week on whether the market is “topping” out that I have my doubts. I would stick with the game plan and remain invested. The worst that could happen is that we have another mild pullback and we fall back into a trading range.