Stocks are indicated to open modestly lower this morning ahead
of a major speech by Janet Yellen at the Jackson Hole conference.
But today's pause will follow the push higher this week that took
stocks to scale the prior all-time peak, with the S&P 500 index
on the cusp of the 2000 level.
Stocks' upward move in recent days and pause today ahead of the
Yellen speech could be interpreted as a 'buy-rumor-sell-the fact'
type of development. But that may not be the right way to look at
what is happening with stocks lately. The reality is that economic
and corporate fundamentals have started showing a lot more vigor
and momentum than has been the case in the recent past. It is
this improving fundamental backdrop, coupled with expectations of a
still-supportive Fed, that has been pushing stocks higher.
The U.S. economy grew at a roughly +3% pace in 2013 and growth
has been looking up this year as well, notwithstanding the
anomalous Q1 numbers. The jobs market has been steadily improving,
with non-farm payrolls in 200K monthly vicinity in recent months
and unemployment rate down almost a percentage point in the past
Wage growth has undoubtedly been on the weak side thus far. But
with the unemployment soon to have a 5-handle, it isn't
unreasonable to expect wage growth to pick up notably in the coming
On the corporate side, we are about to close the books one of
the strongest quarterly earnings seasons in the recent past. Not
only did top- and bottom-line growth rates picked up materially in
Q2, but total earnings for the S&P 500 index (total earnings,
not EPS) reaching a new all-time high.
What could go wrong in this story? The risks remain twofold -
the magnitude of fundamentals improvement may turn out to be weaker
than currently expected and the Fed could surprise by changing
monetary policy in unexpected ways. No one is overly concerned
about either of these risks, though questions about the Fed remain
on top of investors' minds.
Investors worry that circumstances could force the Fed's hands
by making it start the rate tightening cycle earlier than they
otherwise would. To that end, market participants will find it
reassuring if the Fed Chairwoman will just reiterate her public
position on the labor market in her speech today.
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