State of the Stock Market Analysis for the Week Ending June 7, 2014 (Stock Market Has Decent June 6-7-14)
The postman’s creed reads that “Neither snow nor rain nor gloom of night stays these couriers from the swift completion of their appointed rounds.” With a few word changes, that old U.S. mail saying sums up the action we saw in the stock market this week. You could say that “Neither the ECB nor the U.S. employment report nor fear of rising interest rates could keep the stock market from its swift completion, as the Dow reaches all time high along with the S&P 500.” It was a week that began with nervousness, but ended with enthusiasm.
Friday’s action built on the positive vibe that emerged following the ECB’s decision to cut the interest rates it charges banks and to begin new monetary stimulus programs in the European Union. Once investors saw that 217,000 jobs were created in May (versus the expected 210,000) and that unemployment stayed flat at 6.3%, stocks were off to the races. We had a strong Friday close that allowed the major indices to book weekly gains of 1.2% for the Dow, 1.3% for the S&P 500 and 1.8% for the Nasdaq.
The Dow reaches an all time high, and the S&P 500 may have as well, but there are still some pockets in the stock market that are playing catch-up. The Nasdaq hit a multi-year high of 4,371 in March, and with Friday’s 4,321 close, it has about 50 points to go before it can celebrate a new, multi-year high. Likewise, the small cap Russell 2000 scored an impressive 2.7% gain for the week, which finally put it back in positive territory for the year. The Russell 2000 closed at 1,165 today, but like the Nasdaq, it still needs some additional lift to get back to its intraday all-time high of 1,213.
What was interesting about Friday’s employment report was that it was basically a “Goldilocks” number. This reference is, of course, used when economists describe the state of the economy. In the tale of the Three Bears, Goldilocks wanders into the bears’ cottage and finds three bowls of porridge that are either “too hot, too cold, or just right.” She eats all of the porridge that is just right and then she takes a nap. With reference to the employment report on Friday, it was not too hot and not too cold, but rather, it was “just right.” It was not strong enough to trigger Fed action to hike interest rates, but it was also not weak enough to force the Fed to lower rates. It was “just right.”
It was a “good news, bad news” scenario this week for the broader employment picture. The good news was that the U.S. economy has finally gained back enough jobs to top the pre-Great Recession levels seen in late 2007. The bad news is that the labor participation rate fell to 62.8%, and when you do the math, it means that 37.2% of the population of the U.S. is not working. This marks the lowest employment participation level in 36 years, and it suggests that the jobs picture and the broader economy are not as rosy as many of us thought.
So, how can we have a record-breaking stock market if so many people are still out of work? Likewise, how can an economy hit on all cylinders if the job growth was fueled by lower paying jobs? Those are important questions for us to ask, and it makes us wonder if the “recovery” is a lot more hollow than anyone realizes. Bulls are less concerned with aggregate employment numbers and worker participation rates than they are with a decent government jobs report that sends the stock market to new highs.
It might be a little early to tag this week’s rally as The Summer Rally, but there is no getting around the fact that it FEELS like a Summer Rally. Bulls are hoping that this good fortune continues throughout the summer, and if that happens, it could really send the bears running for the hills. Once again, we had a great week for stocks, so stay tuned and have a relaxing and restful weekend. After a few bumps in the road, 2014 is starting to show some real potential for the second half of the year.
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