3 Factors Driving the Market Higher
by Mitch Zacks, Senior Portfolio Manager
The stock market is hitting multi-year highs as U.S. equities are shrugging off any negative news. We’ve identified 3 factors that are driving this market higher. We discuss each of them below:
1. US Jobs Numbers
Around 200,000 jobs were added in November, December, January, and now, just recently, in February. We haven’t seen this strong of a flow in jobs data in over five years. Both ADP jobs data and the Federal government payroll data have showed strength. Unemployment claims were also recently reported at a five-year low.
In September 2012, we saw the U.S. economy adding 100,000 jobs a month. At that time, there were concerns of an economic slowdown caused by the “Fiscal Cliff”. This resulted in the most recent round of Fed bond purchases. In other words, poor fiscal behavior brought monetary authorities to action once again.
We believe the Fed’s quantitative easing program (essentially printing money) has triggered these improving monthly jobs numbers.
We are in the intermediate phase of GDP growth now. With sequestration spending cuts in place, we were looking to see 1.3% to 1.9% GDP growth for the U.S. economy. However, given the strength of these job numbers, our expectations are now up to 3.0% GDP growth for 2013.
Strength in the stock market seems to be predicting this enhanced GDP outlook for 2013. A fairly solid, full-steam ahead economy appears to be here.
One major risk is that the Fed takes its foot off the gas pedal earlier than expected. Therefore, we are watching the FOMC minutes closely.
2. Mario Draghi and Europe Relief
Mario Draghi, the head of the European Central Bank (the ECB), recently kept his short-term policy rate fixed at 0.75%.
In a press conference, Mario Draghi said, “You know the rules. The ball is in the government’s hands”. This is the language of Draghi and the market is buying it. The ECB has made it clear that they will take whatever steps necessary to stabilize the European economic situation.
Mario Draghi also spoke of rising cross-border flows of capital in Europe. This is a sign of the beginning of stabilization. In addition, policymakers have decreased their rhetoric associated with an economic “Domino Effect” caused by peripheral EU countries. As a result, a total collapse of Europe’s financial system is less of a concern.
As the risk of a financial systemic shock in Europe declines, U.S. stock markets rise.
We think another round of policymaking in Europe is needed to help GDP growth. Policymakers at the EU and at the ECB have to go further; and if they do, it will push the S&P 500 higher.
3. Hugo Chavez and Oil Prices
Recently, WTI Crude Oil fell to about $90 from close to $98 a barrel. In other words, we’ve witnessed a nearly 10% drop in oil prices over the last month. The oil markets may be pricing in the passing of Hugo Chavez.
Venezuela is a part of OPEC, and the change in the profile of oil risk, via OPEC, went down. It is now less likely that OPEC will keep their strident pace of collusion on course. As a dictator that nationalized oil companies and sought control with an iron fist, his passing is viewed as a positive sign for the region. His passing may allow Venezuela to embrace a free market, something that would certainly be a chink in the armor of OPEC.
There also continues to be a North American advance in oil and natural gas production. These fresh techniques can be applied to Venezuela, which has the world’s largest oil reserves when the heavy oil sands are included that are located there.
We are still range bound in oil between $90 and $100, but we may remain towards the bottom of that range. As geopolitical risks fall, volatility in oil decreases and this price range shrinks. The increasing stability in the energy market is important to the U.S. economy.
As the global economy gets stronger, demand for oil usually rises, and so does its price. With the potential for new Venezuelan supply, and lower political risk, oil prices are likely to remain stable.
What Does this Mean for Investors?
We are faced with an increasingly rosy economic scenario. Investors are beginning to expect positive things to happen. However, when expectations get high, the risk of disappointment is great.
Market movements are independent of one another over time. Historically, the stock market rises about 70% of the time and declines 30% of the time. This probability is independent over time. In other words, don’t become overly optimistic. Markets rise and fall and it would be normal to see a 10% correction in this market.
As we previously stated, another round of policy activity in Europe could lead to GDP growth there. That is one catalyst to look for which could take U.S. markets even higher.
About Mitch Zacks
Mitch is a Senior Portfolio Manager at Zacks Investment Management. He wrote a weekly column for the Chicago Sun-Times and has published two books on quantitative investment strategies. He has a B.A. in Economics from Yale University and an M.B.A. in Analytic Finance from the University of Chicago.
Mitch also is a Portfolio Manager for the Zacks Small Cap Core Fund ( ZSCCX ).