Blog : This Bull Has Some Charge Left

by Ed Zwirn on July 7th, 2014

Investors returned from the holiday weekend (and the afterglow from Thursday's jobs report) to confront record stock market levels, the increased appetite for taking risks of all varieties and a light economic calendar.

With the Dow Jones Industrial average still hovering above the 17K level as of this afternoon and even riskier stocks holding onto recent gains, investors may be justified in asking themselves that question common to all golden ages (and/or bull markets): How long can this party last?

The answer may well be that this bull still has some charge left in it, and the investor community is apparently buying into this, at least after Friday's jobs numbers. As I pointed out in my most recent investment blog, the release by the Bureau of Labor Statistics of June's nonfarm payrolls report offered unambiguous evidence that the U.S. economy has pulled out of the steep decline it experienced in Q1.

Not only did June's 288,000 job creation number come in well above consensus, it also represented a steep rise over May's previously reported 217,000 job creation tally. Significantly, not only was May's tally revised upward, to 224,000, and April's tally was upped from 282,000 to 304,000, the unemployment rate fell at the same time, from 6.3% to 6.1%, its lowest level since September 2008.

At the same time, surprising no one, the average work week held steady during the month at 34.5 hours and hourly earnings rose 0.2%, the same rate of increase seen in May.

The upshot was a pronounced rally for stocks, with the Dow landing Friday at 17,068.26, up 1.3% on the week from the 16,851.84 previously noted on the Peter Leeds site.

Following the recent trend, the broader market outperformed the 30 blue-chip Dow stocks, with the NASDAQ composite gaining 2% on the week. Penny stocks, as represented by the Russell 2000 small-cap index, gained 1.6%.

But other economic news released in the week leading up to Independence Day were basically nothing to set off fireworks about:

-- Tuesday's construction spending report had been expected to show a 0.4% rise for May, following April's 0.2% increase. Instead, May squeaked by with a 0.1% increase, while April's figure was upwardly revised to reflect a 0.8% spike.

-- Later that day, June's auto sales report weighed in at 5.9 million, following May's 5.7 million. Truck sales, which came to 7.7 million in May fell off a bit, to 7.5 million.

-- Wednesday saw the release of a report showing factory orders down by a worse-than-expected 0.5% in May, following April's upwardly revised 0.8% increase.

Looking ahead this week, expect at least some attention to get diverted to Wednesday afternoon's FOMC minutes release. This release will reveal the deliberations by the U.S. Federal Reserve Governors during the two day meeting which wrapped up June 18 with an inconsequential announcement. While not expected to add anything of substance to our view of the U.S. economy and the central bank response to it, it way represent a short-term trading opportunity based on any "wisdom" it may contain about the future of interest rates, which are likely to stay very low for a very long time in any case.

This is about it in terms of legitimate economic news coming out in this post-Fourth of July trading week. Barring any surprises coming from places like the Middle East and eastern Europe, there is probably little that can move the market to any significant extent in the coming week or so. Of course, with blood being spilled at both of those venues, it is possible that concern over global stability and global growth can spook even the most bullish among us.

Looking farther ahead, next week will see a return to heavy information bombardment. The week of July 14 to 18 will see key updates on retail sales, producer prices, industrial production and housing starts and building permits. This will tie up Q2 with a ribbon, and strong showings for these figures will mean that the economy had in fact rebounded sharply starting in April.

The proof of this pudding will come out on July 30, with the release of the government's advance estimate of Q2 GDP. This will almost certainly be a big improvement over the 2.9% decline seen for the U.S. economy in Q1 and would signal that the stock market has not (at least yet) gotten too far ahead of the real economy. This would confirm the signal given off by the latest jobs numbers.