Since March 2009, we’ve seen the end of the Great Recession; a painfully slow and weak recovery; debt crises in Greece, the eurozone and the U.S.; the demise of the commodities super cycle leading to a collapse in prices for everything from oil to copper to gold; secular bear markets in once-booming emerging markets; and heavy new regulation of banks and Wall Street, damaging the critical financial sector.
And yet every major U.S. stock index — the S&P 500 , the Dow Jones Industrial Average , the Nasdaq Composite index and the small-cap Russell 2000 hit all-time highs this year.
Then came the August sell-off, in which stocks gave up 13% to 14% of their value amid fears the global economy, especially China, was weaker than everyone thought.
At the time, we said it was most likely a correction and stocks would rally. They have, strongly, but last week’s blowout jobs report and a growing belief that the Federal Reserve would raise interest rates in December for the first time in nine years was enough to stop the rally in its tracks, just shy of the previous highs.
And there’s the rub.
For this bull market to resume, it needs to close above those all-time highs — 2,130 in the S&P 500; 18,312 in the Dow, 5,172 in the Nasdaq — and stay there. We’re now about 2% to 3% short.
The stock market gains over the past few weeks came amid mixed signals in the U.S. economy — strong housing and auto sales, fair consumer confidence, and weak job growth in August and September — but almost uniform weakness overseas, especially in China and Europe. That has other central bankers ready to slash rates (China) and keep the printing presses running (Europe and Japan).
This flood of liquidity from global central banks has eclipsed the Fed’s own efforts and in some ways tied its hands, because of concerns about global weakness and the impact of an even stronger U.S. dollar on our own businesses.
Last week’s jobs report was probably a game changer. The 271,000 new jobs created in October and decent wage growth caught everyone by surprise and may finally give Fed Chairwoman Janet Yellen the cover she needs to carry out her long-term plan to raise interest rates gradually and modestly.
One big hint the tide is turning: On Monday Eric Rosengren, the dovish president of the Federal Reserve Bank of Boston, said December “could be an appropriate time for raising rates, as long as the economy continues to improve as expected.” Rosengren will vote on the rate-setting Federal Open Market Committee next year.
But for the indexes to break through their previous highs convincingly, investors need to believe that rate hikes won’t lead to a bear market or recession. So far, they haven’t made up their minds, which explains a lot of the markets’ churning and confusion.
The Fed ended its last round of extraordinary bond buying (quantitative easing, or QE3) on Oct. 29, 2014. In the year or so since, the S&P 500 has gained less than half of 1% as speculation turned to when the first rate hike would occur. Talk about marking time!
And yet there’s some precedent for hope. When former Fed Chairman Ben Bernanke mentioned the end of QE3 in Congressional testimony on May 22, 2013, investors dumped stocks and bonds in what came to be known as a “taper tantrum.” That happened again later that year as the Fed began unwinding its super-stimulus plan.
But when the dust eventually settled, the S&P 500 rose 20% from Bernanke’s first hint of tapering until QE3 finally ended.
This time may be different. Earnings growth is decelerating. As of Friday, FactSet Research said third-quarter earnings for the S&P 500 were on track to fall 2.2% from the third quarter of 2014. That’s less bad than analysts had expected, but it still marks the second consecutive quarter of earnings declines, the first time that’s happened since 2009. Recently, Goldman Sachs, among others, cut its S&P 500 earnings forecasts for 2016.
Meanwhile, the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD) have cut their projections for world GDP growth in 2016. If U.S. rates creep up while global economies languish, the strong dollar may reduce U.S. multinationals’ earnings even more.
But right now, all eyes are on the Fed. Everyone will be watching closely to see what markets do if it finally pulls the trigger and then continues raising rates slowly and modestly. The next few months will tell us if this is the beginning of the end for this bull market, or just the end of the beginning.
Howard R. Gold is a MarketWatch columnist and founder and editor of GoldenEgg Investing, which offers exclusive market commentary and low-cost, low-risk retirement investing plans. Follow him on Twitter @howardrgold.
link : http://stream.marketwatch.com/story/markets/SS-4-4/SS-4-87936/