Stocks swept higher again on Monday in very quiet pre-holiday trading. With no substantial negative news to offset last week’s momentum, shares continued to move higher, led by the Nasdaq and the small-caps.
Expect the rest of the week to be quiet as well, with low trading volume and subdued news flow due to the holidays. The markets will close at 1:00 p.m. ET on Christmas Eve, and will remain closed on Wednesday for Christmas. As a result, Wall Street tends to empty out, which is why volume is way down.
The big news Monday came from Apple (AAPL), which announced a multiyear iPhone sales agreement with China Mobile (CHL), the largest mobile vendor in that country. Apple shares shot higher by 3.8%, and brought with it all of its component suppliers, including NXP Semiconductor (NXPI).
As for the holiday buying season, well, it’s been a fairly tough stretch for most retailers not named Amazon (AMZN). It was reported today that U.S. consumers purchased less on the final weekend before Christmas than last year despite substantial discounts.
RetailNext reported that U.S. retail sales at brick-and-mortar stores on Friday and Saturday, which are two of the four most important shopping days of the season, were lower year over year by around 5%. Store visits were down 7% year over year. Online sales, however, have remained strong despite an intensely promotional environment (i.e., there is a lot of dramatic discounting going on).
Elsewhere in the world, IMF chief Christine Lagarde was optimistic over the weekend in an interview about the global economy, which is rare for her. She cited a pickup in U.S. growth and falling unemployment in making the case for a bullish global economic outlook. She also stated that the Fed’s tapering announcement and the budget deal in Washington provided “more certainty for 2014.”
Lagarde is definitely on the right track about the Fed. The announcement of what I would call “taper lite” last week removes a high-profile overhang from the market. And it was helped by the fact that Fed officials paired it with enhanced forward guidance that kept a focus on the extremely gradual nature of the interest rate normalization process ahead.
The taper caper was also boosted by the fact that it signaled that the Fed sees a strengthening economy ahead, a view that was backed up with support from positive new data on enterprise technology spending, as well as a busy week in mergers and acquisitions.
The decision was obviously a big surprise to the market — otherwise there would not have been such an outsized reaction. This is kind of odd when you consider that investors have had six months to think about tapering since it was first run up the flagpole by Fed chairman Ben Bernanke in June.
Two points I want to make about that:
- This was actually the second time in a row that the Fed has defied the conventional wisdom. The first was back in September when the consensus expected a taper and didn’t get one; the second was last week when the consensus didn’t expect a taper and did get one. In short, the consensus has had a tendency to be very wrong about Fed action, and thus it behooves us to have an alternative point of view that fits the facts in an unconventional way.
- The Fed appears to have tired of quantitative easing but has not tired of providing a very accommodative monetary policy. It has basically decided to adjust its “mix of instruments,” in the jargon of monetary policy officials. The central bank may be a bit more skeptical of the utility of QE, but it has decided that providing firmer guidance about how long it intends to keep interest rates low — i.e. “well past” the 6.5% unemployment level — provides stimulus at a lower cost.
In other words, the market has rallied since Wednesday because the amount of stimulus hasn’t changed, only the way it is delivered.
Goldman Sachs (GS) analysts argue that maintaining a high level of stimulus through more specific forward guidance is appropriate for several reasons. First, inflation remains significantly below the Fed’s 2% goal. Second, the labor market still has plenty of slack when the participation gap is considered. Third, the “neutral” Fed funds rate might be lower than normal now than in the past due to structural headwinds.
Goldman expects the first interest rate hike to be at least two years away — sometime in early 2016. If that really is the case, then Fed support could keep the market rally going for at least one to two more years. Keep that in your back pocket as a reminder to buy during dips in the coming months.
And while you’re at it, think about the S&P 500 Large Cap Index (SPX) chart above, which reminds us that the market rose to new highs repeatedly for 18 years from 1982 to 2000. It then took a break for 12 years, and is now just a year into its latest streak of new highs.
For some reason, new highs worry people when they shouldn’t. The highs just reflect a rising tide of ambition — the relentless yearning, energy and innovation of millions of individuals as they create and consume new products and services to further their own interests.
Just as you would not expect a four-year-old to stop growing taller, you should not expect the market to stop rising to new highs.