There is plenty of rejoicing on Wall Street as traders celebrate the third anniversary of the beginning of the current bull market rally with heavy buying on Tuesday. The Dow Jones Industrials surged 218 points to above the stubborn 13,000-point level, while the NASDAQ blew above 3,000 with very little effort. The bull market rally is being driven by an improving domestic economy on the job creation front and housing sales are rising in spite of a continued lag in the price of homes across America.
Banks provided some much-needed leadership to the bull market rally after JPMorgan Chase & Co. (NYSE/JPM) surged 7.03% after announcing a dividend hike and a whopping $12.0-billion share buyback. Citigroup Inc. (NYSE/C) surged 6.30% on speculation it would be allowed to increase its dividend, but failed in the government’s stress test.
The question is: where does the bull market rally go from here? The valuation remains reasonable, but the degree and pace of the buying is overdone in my view.
At the start of the year, I thought a 1,400 target for the S&P 500 could materialize if everything panned out and there were no surprises in Greece and the eurozone. So here we are, about 11 weeks into the year, and the bull market rally is in full force, with the S&P 500 up 10.85% to 1,394. Looking ahead, 1,500 may be in play based on the current momentum, but I doubt that will happen this year given the rapid advance of the bull market rally.
The Federal Reserve met for the third time this year and really offered very little as far as new information. It maintained the federal funds rate at zero to 1/4 of a percent that could hold until late 2014. The Fed said the jobs market was mending, the inflation rate was under control, and the economy was showing continued evidence of improving, which means no additional stimulus. Based on the fact that the Fed is holding rates low for another two years or more, one can see that the Fed wants the low interest rates and monetary fine-tuning to work the economy back to shape in lieu of expensive fiscal expenditure. The low rates will help the bull market rally.
With this being a Presidential election year, President Obama must be a bit more relaxed given the economy, jobs creation, and bull market rally. He would probably refrain from or will not be allowed to add major spending programs.
So, while things are moving along here. I don’t advise taking your eyes off the eurozone situation. Fitch ratings agency has upgraded Greece higher from the previous “restricted default” after the country was able to get another $172 million in loans.
The ironic thing is what Greece Prime Minister Lucas Papademos said after the debt swap deal was approved: “For the first time, Greece is not adding but taking debt off the backs of its citizens.” You kind of wonder what the debt holders who had to take a significant loss are thinking. The problem will be that, if Greece again runs out of funds, it would likely mean banishment from the eurozone. And, of course, there are the other PIIGS countries (Portugal, Ireland, Italy, and Spain). It is not clear sailing here either and I expect there could be more issues.
Stay tuned. I do expect there will be surprises down the road that could hurt the bull market rally.
The February Retail Sales reading was the strongest in months, but you still need to be careful when buying retail stocks, as I discussed in How to Make Money with Retail Stocks Right Now.