It’s been a heady week for the markets: The Dow Jones Industrials burst through 13,000; the Nasdaq skipped over 3,000 for the first time since 1999; and yesterday the S&P500 topped 1,400 for the first time in almost four years. Meanwhile, the US Treasury market took it on the chin because any hint of good news in the economy is bad news for the inflation-sensitive bond market.
Yesterday, the equities markets cheered the weekly unemployment claims report, which came in as expected at 351,000, and the producer price index, which gained 0.4% in February, the most in five months. Two regional Federal Reserve banks also reported that manufacturing activity was expanding from New York to Delaware. Even the Dow Jones Transports put in a great performance Thursday, rising 3.27% today. The Transports had been lagging behind the other indexes, a bad sign because they include bellwether companies for the economy like FedEx.
These milestones are important – they can create a new cycle of good feeling about the economy and hope for the future. Even though the recession officially ended more than two years ago, investors have been cautious.
But even now, market watchers are concerned that the current ebullience in the market might not be either deep enough or wide enough to proclaim a new beginning. “I wouldn’t say we are anywhere near an ‘all clear’ sign,” says Joe Saluzzi, co-head of equity trading for Themis Trading.
Here are some of the lingering concerns:
- Apple accounts for too much of the victory. Without Apple’s meteoric rise, the S&P 500 would not yet have touched 1,400; it would have risen just a tad more than 10% rather 11.5%. In the Nasdaq, Apple accounts for 11.75% of the index. Apple is up 45% this year.
- Volume has been sub-standard for most of the rally. “The market is up 26% since October, I would expect volume to be better. It hasn’t brought more people in,” says Howard Silverblatt, senior index analyst at Standard & Poor’s. Traders are pushing prices higher, not a broad array of investors.
- The economic data are fickle. And really. They aren’t that much better. Gluskin Sheff chief economist David Rosenberg has been warning that the good data are living on borrowed time. And this week Bloomberg BusinessWeek published a story asking whether the warm weather was stealing future business activity.
- The Federal Reserve is still worried. Yes, the meeting minutes this week gave a strong nod to the improving job market but Goldman Sachs chief US economist Jan Hatzius today released a report saying the Fed would probably engage in some kind of bond-buying program by the summer to ensure the economy doesn’t falter. That’s another way of saying maybe we aren’t out of the woods yet.
- The stocks leading the rally are suspect. Banks are enjoying a big bounce – especially since the Fed said the big ones were in good shape. But Joe Saluzzi says the interest rate environment is less than ideal for banks, which need long-term rates to be much higher than short-term rates to make money.