Markets rose last week as Janet Yellen passed her first test as Fed Chairman Bernanke's prospective replacement. Appearing before the Senate Committee on Banking, Housing and Urban Affairs, she appeared cool, calm and collected. Her remarks assured markets that she would not quickly deviate from the current policies. The S&P then rallied to a record close.
On Friday, China's leaders outlined sweeping social and economic reforms. China will ease its "one-child" family planning policy, and abolish the controversial "re-education through labor" prison camp system. Further reforms include a move towards market-based pricing, eliminating residency restrictions to encourage migration into rural areas, and the institution of an environmental tax.
China's expected growth this year is a 23-year low of 7.5%. Its leaders are seeking to encourage new sources of growth through these reforms.
The Good
Following a few years of political circus, Janet Yellen's competent, non-dramatic Senate appearance last week was manna from heaven.
The market's technical picture continues to present a bullish picture.
U.S. oil production continues leading towards energy independence. We provided 90% of the energy we used last May. Our LNG and shale renaissance is gaining traction. Might we soon sever our dependence on OPEC? Consider the tonic that could serve as for the long-term U.S. economy. Perennially lower, less volatile energy prices. A boon to corporate and Main Street America.
The Bad
Q3 earnings season has concluded. The beat rate, representing the rate of companies outperforming expectations, was disappointing at 58.6%. Year-over-year growth was 5.6%. Revenue growth was 3.2%.
Remember the Eurozone recovery? Well, it appears to be weakening. The WSJ said it still "feels like a recession." In the piece (here), Barry Ritholtz says the proselytizers are wrong here. Hope he's right.
Immigration reform? Could be DOA. At least for this president. More here.
Will this year's holiday shopping season pull the rug from under us? Kohl's and Wal-Mart both reported disappointing numbers. Nordstrom and Macy's, however, met and beat expectations. But, estimated household Christmas expenditures are trending below average. Could be that middle class consumers will not shop till they drop.
The Ugly
ObamaCare's rollout? A nightmare. Political convictions aside, we all would appreciate wider access to more affordable healthcare. This ain't that. And even those who support the Affordable Care Act are touting its implementation as a failure, thus far.
With the administration now pushing back deadlines for rollout of specific facets of the law, the uncertainty that has pervaded than business landscape and prevented a labor market recovery will linger longer.
The Bottom Line
ObamaCare's rollout has been ugly. It does not help the economy. Yet, the precursors of a major market correction are missing.
1. Oil/gas prices are falling.
2. Inflation/interest rates remain historically low.
3. Wall Street and Main Street remain bearish enough.
4. The St. Louis Fed Stress Index is low.
And all conditions remain ripe to push trendlines higher. The market is morphing from a fear-based environment to one of opportunity. Stock picking and sector selection will be rewarded. As will less-favored areas of the market, like cyclical, large cap tech and financials.
Conclusion? Could be another risk-on rally to end the year. Especially if you're properly positioned.
Still on the sidelines? Don't jump right in. Dollar-cost average into fairly valued positions on pullbacks. Buy under-appreciated dividend stocks. Could be an opportunity to ride the tiger.
Weekly Results
Major markets finished higher last week. The DJIA rose 1.27%, the S&P 500 gained 1.56%, and the Nasdaq advanced 1.70%. Small cap stocks climbed 1.48%. And the 10-year Treasury bond yield fell 4 basis points to 2.71%. Gold gained $1.60 per ounce, up 0.12%.