After all was said and done it was a very bullish month on Wall Street. The Dow Jones Industrial Average, the benchmark S&P 500, and the small-cap Russell 2000 all hit new record highs in February and the tech-heavy Nasdaq Composite galloped higher and is inching closer to its record high of 5132.52, hit in March 2000. The bullish fundamental backdrop remains in place which is healthy for the market. The twofold bullish backdrop remains: an improving global economy coupled with “easy money” from major central banks. From our point of view, pullbacks should be bought, until material weakness develops in the major averages. In the short-term we would be remiss not to note that the major averages are clearly extended and due for a nice pullback to consolidate their recent (and robust) rally.
Mon-Wed’s Action: Greece Remains In Focus
Stocks slid on Monday but ended near their highs as the world waited for Janet Yellen to begin her two-day testimony on Capitol Hill. Economic data was not promising – Existing Home Sales, the Chicago Fed National Activity, & The Dallas Fed Manufacturing Activity all missed estimates. Stocks rallied to new record highs after Janet Yellen remained dovish and said a rate hike would not be likely in the next few meetings. Traders interpreted that to mean that the Fed will not raise rates until October. In other news, the Eurozone approved Greece’s bailout extension plan. Greece said it become more conservative with fiscal matters including government spending and tax collection. In the short term, this helped allay concerns of a Grexit (Greek exit). Economic data in the US was mixed at best. The S&P/Case Shiller home price index topped estimates which bodes well for the housing market. Markit’s ($MRKT) US PMI numbers also beat estimates. On the downside, Consumer Confidence fell in February to 96.4, which missed estimates for 99.5. The February Richmond Fed Manufacturing Index came in at 0, missing estimates for 6.0. Stocks were relatively quiet on Wednesday as Yellen spent another day on the Hill. Economic data was mixed. January New Home sales edged higher to 481k, slightly beating the 470k consensus. Meanwhile, weekly Mortgage applications slid by -3.5%, which was better than the prior week’s dismal reading of -13.2%.
Thurs & Fri’s Action: Stocks Pause Near The Highs
Stocks ended mixed on Thursday as investors digested mixed economic data. Deflation concerns remained elevated after the Consumer Price Index fell 0.7% in January which was the largest monthly decline since December 2008! The large decline was due to plunging gasoline prices. Core prices, which exclude food and energy, rose 0.2%. Separately, d urable goods rose 2.8% last month which beat estimates for a gain of 1.6%. Initial Jobless Claims were 313k, which just missed estimates. James Bullard, President of the St. Louis Fed, told CNBC that the recent economic data was supportive of a rate hike by the Fed sooner rather than later. Investors largely shrugged off his comments because Yellen is in charge and she was so dovish. Stocks fell on Friday as investors wrapped up the last day of the week and month and digested the latest round of economic data. The government revised Q4 GDP down to 2.2%, just higher than the 2.1% expectation. GDP jumped 5.0% in Q3 2014. Separately, the Chicago Purchasing Managers Index totaled 45.8 which was the lowest level since July 2009. Consumer sentiment came in at 95.4 for February which beat estimates but was lower than January’s 98.1. Finally, The National Association of Realtors said pending home sales jumped to the highest level in 18 months.
Market Outlook: The Central Bank Put Is Alive And Well
Remember, in bull markets surprises happen to the upside. This has been our primary thesis since the end of 2012. We would be remiss not to note that this very strong bull market is aging (turning 6 in March 2015 and the last two major bull markets ended shortly after their 5th anniversary; 1994-March 2000 & Oct 2002-Oct 2007). To be clear, the central bank put is very strong and until material damage occurs, the stock market deserves the longer-term bullish benefit of the doubt. As always, keep your losses small and never argue with the tape.