Is the Bull Market Over? Weekly Update – June 23, 2014

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Image courtesy of FreeDigitalPhotos.net/ddpavumba

Markets rallied strongly last week and closed at new records for the S&P 500 and Dow. Though stocks ran in circles early in the week, they picked up the pace after Wednesday’s reassuring Federal Open Market Committee (FOMC) meeting announcement. For the week, the S&P 500 gained 1.38%, the Dow grew 1.02%, and the Nasdaq added 1.33%.1

There were no surprises from the Fed’s June Open Market Committee meeting. The FOMC announced another $10 billion cut to quantitative easing, lowering monthly bond purchases to $35 billion, and emphasized its commitment to data-driven decision-making with respect to future interest rate hikes. The Fed also released economic projections for the rest of the year, forecasting an unemployment rate of 6.0%-6.1% at the end of the year. On the down side, the Fed lowered expectations for annual Gross Domestic Product (GDP) growth, projecting that the economy will grow just 2.1%-2.2% this year.2 Investors counted the meeting as a win, reassured that the Fed is still willing to support markets.

Stocks jogged past more milestones last week, producing record highs for the S&P 500 and the Dow on Friday. Such performance naturally leads to the question: Is the bull market ending? By the calendar, you might think so. The average bull market lasts 62 months,3 and we passed that mark earlier this year, but there are several good reasons for why we aren’t looking for the end just yet:4

1)    Economic growth is still moderate. Bull markets often end when the economy gets overheated and investors start worrying about the next recession. GDP growth is still below-trend, and current forecasts show that it probably won’t crack 3.0% until 2015.5 Future economic growth potential may give this bull market a second wind.

2)    There’s still money on the sidelines. Many investors and corporations have piles of cash sitting around uninvested. When these stragglers finally start buying into the trend, the inflow of cash may send markets higher.

3)    Plenty of bull markets last longer than 62 months. The one between 1987 and 2000 lasted roughly 150 months, and the rally between 1949 and 1956 lasted about 87 months.6

Now, we can’t assume that markets will continue their upward progress indefinitely. As we discovered in the first few months of the year, declines do happen. One of the benefits of an active management strategy is that we can use these interruptions in the overall trend to cherry pick solid investments at attractive prices. Overall, we’re still cautiously optimistic about market performance going into the latter half of the year. We’ll know more about future prospects as Q2 economic data and earnings reports trickle in over the coming weeks.

ECONOMIC CALENDAR:

 

Monday: PMI Manufacturing Index Flash, Existing Home Sales

Tuesday: S&P Case-Shiller HPI, New Home Sales, Consumer Confidence

Wednesday: Durable Goods Orders, GDP, EIA Petroleum Status Report

Thursday: Jobless Claims, Personal Income and Outlays

Friday: Consumer Sentiment

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HEADLINES:

U.S. exports slump. America’s current account deficit – the difference between imports and exports – widened in the first quarter largely because the cold weather caused exports to pile up in port. Hopefully, stronger overseas demand will cause exports to pick up in the second quarter.7

Weekly jobless claims fall. The number of Americans filing new claims for unemployment benefits fell more than expected last week, suggesting that labor market conditions continue to improve.8

U.S. manufacturing production rises. Factory production rose significantly in May, supporting the belief that the sector is rebounding strongly after the first quarter slowdown. Since manufacturing contributes 12.5% to GDP growth, we can hope for a strong showing this quarter.9

Oil prices rise on Iraq fears. The price of Brent crude oil rose above $113/barrel as the fighting in Iraq intensified and shut down the country’s biggest refinery. Though exports have not yet been affected, it’s likely that prices will continue to be affected as investors respond to disruption fears.10

 

 

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