A Strong Economy and the S&P

A Strong Economy and the S&P
By Paul J. Lim
Posted 5/29/07

After trading above its all-time closing high of 1527.46 last week, the Standard & Poor's 500 index fell back below record territory, leading some investors to wonder if history was repeating itself.
Related News

The last time the S&P traded above 1527—in March 2000—the stock market pulled back considerably. And that sell-off eventually morphed into a historic bear market that eventually cut the value of the equity market nearly in half.

But market strategists are convinced that this time around, things will be different. For starters, the pullback last week was long overdue. The bull market that began on Oct. 9, 2002, has been one of the longest uninterrupted rallies in Wall Street history. So it's not surprising that investors wanted to take some profits off the table.

What's more, this bull market has been mild by historic standards, with stock prices up only around 95 percent thus far. Since World War II, bull markets have pushed stock prices higher by nearly 155 percent on average. So this bull probably still has some room to run.

Finally, one could argue that the stock market actually fell last week because the news was too good: Investors were caught off guard by how strong the economy seems to be.

Right now, Wall Street is divided into two camps. The first group of investors thinks the economy and corporate profit growth are strong enough to keep stock prices moving higher. So every bit of good news that comes out about the economy—such as last week's report on durable goods—emboldens this group.

But the second camp is actually praying for weaker-than-expected news on the economy. This group of investors wants the economy to slow to the point where the Federal Reserve Board would feel it necessary to step in and jump-start growth by lowering short-term interest rates. In the past, when the Fed has trimmed rates to boost growth, stock prices have risen.

Unfortunately for this second camp, the economy appeared to be stronger than expected—at least that's how it seemed last week. Lynn Reaser, chief economist for Bank of America's investment strategies group, noted that the economy appeared to be slightly more "animated" than investors thought.

Durable-goods orders grew 0.6 percent last month, on top of a 5 percent jump in March. And the job market was on the upswing. Reaser thinks the economy probably produced about 120,000 new jobs in May.

"Job growth is likely to be enough to keep the jobless rate stable at 4.5 percent," she says, "with workers seeing a 0.3 percent boost in their hourly earnings."

All of this points to no Fed rate cut in the coming months; the economy seems to be growing sufficiently on its own. Merrill Lynch economist David Rosenberg notes there is now just a 4 percent probability, based on Fed funds futures contracts, that the Fed will trim rates by August. Only a few months ago, there was a 90 percent probability of a rate cut by August.

To be sure, there is still a 40 percent chance that the Fed will cut rates before the year is out. But that doesn't seem to be enough to boost the spirits of those investors who were banking on quick Fed action.

But at the end of the day, isn't it good news for investors that the Fed doesn't feel action is needed?

 

pullback?????





"But market strategists are convinced that this time around, things will be different. For starters, the pullback last week was long overdue. The bull market that began on Oct. 9, 2002, has been one of the longest uninterrupted rallies in Wall Street history. So it's not surprising that investors wanted to take some profits off the table."

 

Pick a side, any side, as long as it is long and bullish it seems you can't yet lose.

Maybe we'll see some sideways action through summer as markets do little...I don't see the big selloff coming, no one is selling it seems. I'll take some neutral/negative options stances this summer probably, but until we see a serious slowdown in the indices, stock seem like they can push higher just due to low selling volume which in and of itself helps push stocks higher.

 

"look, the economy is stronger than expected"
"you are right, let's short"