Stock Market Today: Risky Complacency Brings Stocks Higher
NEW YORK ( TheStreet) -- Major U.S. stock indices settled Monday higher as the markets returned to a state of complacency defined by expectations of extended Federal Reserve support.
The Dow Jones Industrial Average was up 0.46% to 16,569.28. The S&P 500 was up 0.72% to 1,938.99. The Nasdaq tacked on 0.72% to 4,383.89. A confluence of factors including concerns about early Fed tightening rocked the global markets last week, causing the S&P 500 to suffer its worst weekly drop since June 2012 and the Dow to turn negative for the year. But Friday's solid yet still weaker-than-expected jobs number calmed investors by triggering their expectations that the Fed will stand pat on record-low interest rates at least until June 2015.
The widespread expectation is that the Fed will continue to save the day on any hint of weak fundamentals. The markets do not appear to be ready for any type of early Fed tightening.
Even cautionary remarks on excess from Fed Chair Janet Yellen have generally be dismissed. In July she said she's been seeing excess in biotech stocks and other parts of the markets, but investors brushed aside the comments as "unsolicited." Doug Cote, chief market strategist at Voya Investment Management, said that the market ought to have paid attention to the message she was trying to telegraph: the Fed may have to raise rates earlier than expected, and that investors who are far out on the risk curve might be in trouble if they don't start diversifying effectively.
"The Fed is looking like they're hand is going to be forced," said Cote. "Increasingly the Fed is looking behind the curve due to extraordinarily positive economic data . . . the Fed can't be this far behind the curve," Cote explained. "They're going to have to signal that they're going to have to raise rates sooner than the market is really discounting, probably early next year."
Examples of this "extraordinarily positive" data include last week's 4% annual rate in U.S. second-quarter GDP and 6% when inflation is added in, and the July manufacturing ISM read of over 57. Evidence shows that the Fed coming closer and closer to achieving its dual mandate on inflation and employment.
"To me, what the market did last week was the shot across the bow signaling impending volatility is near, and so I'm taking that as a warning signal that's kind of like a tremor in an earthquake," said Cote.
Carter Worth, chief market technician at Sterne Agee, warns that the market is long overdue for a loss of 5% or more. Such drops usually occurs every 71 days or 3.5 months, according to Worth. It's already been six months since the broader market last saw a 5%-plus decline.