With the S&P 500 only off its 52-week high by 2% and with the Nasdaq (-5%) and Dow Industrials (-1%) also closing in on record territory, investors yesterday elected to sell into strength in the last hour of trading. In the process, delivering a familiar tone to the price action in equities that has consistently prevented bulls from celebrating a major breakout into record territory. That may change in coming days and weeks.
A breakout into record territory by equities must have the sponsorship and support of earnings, economic data, monetary policy and a continued rally in crude prices. Earnings have, as expected thus far, been modestly better than expected by a rate of 6.5 – 3.5 for the S&P 500. The better than expected results are due in large part to lowered expectations but still remain a positive factor for the market this earnings season. The economic data we have received in recent weeks, save employment gains which have remained very constructive, have been mixed. In fact, the data has been just mixed enough to keep the timing of the next interest rate increase uncertain. That has been a positive for markets as well. As for crude, the failure of any production freeze out of Doha last weekend, much to my surprise, has proven to be unimportant to investors. This week alone crude WTI has rallied 9.7% in three days. As you know, I have been calling for resistance at $42/bbl. Yesterday crude managed to trade up to $43.67/bbl.
How I See It –
If, and that is a big if, we continue to see support for equity markets marshalled by the factors outlined above, bulls may finally have that record breaking move to the upside that they have been waiting for. Increasingly, crude is the wild card as earnings, economic data and the interest rate narrative have remained fairly consistent.
One of the key factors that has prevented the Fed from being able to justify a rate increase this year has been the lack of inflation as measured by the PPI and other key economic data metrics. That may change if employment gains continue and crude continues to rally. Rising employment roles and a continued rally in crude prices will ultimately force inflation into the open – effectively forcing the Fed’s hand to raise rates another 25bps – sooner rather than later this year.
The question then becomes, can the Federal Reserve raise rates if it needs to in a world of anemic and/or contracting growth?
Given recent emphasis by the Federal Reserve on the global economic landscape, in respect to domestic monetary policy, it is not entirely certain.
flickr photo: Martin Pettitt – Ipswich, Waterfront, Ipswich Campus, The Big Question Mark Sculpture