Stocks closed higher on Friday, with the Nasdaq and S&P 500 gaining 1.57 and 1.03 percent, respectively. The Dow Jones Industrial Average again moved above 17,000, closing the day up 0.73 percent. For the week, the DJIA improved 0.90 percent, while the S&P 500 improved 0.50 percent and the Nasdaq added 0.40 percent. Considering the S&P 500 saw its largest daily decline since April 10th on Thursday, today’s rebound should be reassuring for investors.
On Thursday, global markets were rattled by additional sanctions placed on Russia by the United States and the European Union. This nervousness was exacerbated by the tragic downing of the Malaysian airliner over Ukraine. This news sent the already weak Russian ruble and Russian stock market sharply lower. European and American markets followed, while commodity, energy and gold prices spiked higher. Israel’s ground offensive into Gaza caused even more unease.
Entering earnings season, the performance of individual stocks is providing a positive outlook. On Friday, for every company on the New York Stock Exchange that lost ground, five companies saw their stock price increase. Earlier in the week, shares of Intel (INTC) gained nearly 10 percent following a strong earnings report. Intel shares had previously spiked higher in June when the firm said this quarter’s earnings would be better than expected. Its shares are up roughly 20 percent since the original upward guidance. Google (GOOG) beat sales estimates by about 3 percent. In the financial sector, J.P. Morgan (JPM), Goldman Sachs (GS) and Morgan Stanley (MS) each reported solid earnings. Given that expected growth over the remainder of the year is relying heavily on the outperformance of this sector, these reports are positive for the broader market.
CSX Corp (CSX) sees strong demand in the third quarter, another sign that the predicted pick-up in the economy is still likely. This may help transportation stocks remain among the leading market sectors. Additionally, United Healthcare (UNH) and Johnson & Johnson (JNJ) reported better than expected second quarter results, which is positive for the healthcare sector. The earnings beat at UNH was driven by the health information technology division.
The Fed made waves and generated headlines in its report to Congress on July 15th, submitted as part of chairman Yellen’s testimony. The report said, “Equity valuations of smaller firms, as well as social media and biotechnology firms, appear to be stretched, with ratios of prices to forward earnings remaining high relative to historical norms.” The comments focus on sectors of the market that had already performed poorly in 2014 and led to further selling immediately following the dissemination of the comments.
The Fed doesn’t see the market as overvalued, though. The Fed wrote, “Valuation measures for the overall market in early July were generally at levels not far above their historical averages, suggesting that, in aggregate, investors are not excessively optimistic regarding equities.” The Fed report dinged small caps and the aforementioned sectors, but the effect will be limited. In the 1990s, Alan Greenspan made his famous comments about “irrational exuberance” years before the bull market ended, and well before the truly irrational behavior actually began. In the long-run, the market responds to Fed policy, not comments.
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