Fittingly, the S&P 500 sprinted into Friday's close, breaking out of a narrow trading range to close at its high for the session.
Its bullish disposition and that of the other major indices of late has been predicated on the market's belief that the brouhaha in Washington over the budget and the debt limit will ensure that the Federal Reserve is going to defer a decision to taper its asset purchase program until 2014 at the earliest.
That sense of things has been underpinned by three factors:
- The understanding that the fiscal fight was a headwind for the economy
- The recognition that the Fed held off on a tapering decision at its September meeting in part because of fiscal headwinds; and
- Incoming data that continue to point to below-potential growth for the US economy
Despite the relatively weak employment report, the stock market rallied the day of its release, sensing it would keep the Fed on hold with its current policy. The Durable Orders report for September and the final University of Michigan Consumer Sentiment report for October on Friday also underpinned that expectation.
- Total durable orders rose 3.7%, but that was owed entirely to a 12.3% increase in transportation orders. Excluding transportation, orders declined 0.1%. Nondefense capital goods orders, excluding aircraft -- a proxy for business investment -- dropped by 1.1% while shipments of those goods, which factor into the GDP computation, declined 0.2%.
- The final sentiment reading fell to 73.2 from 75.2 and was nearly 10 points lower than the final reading for September
Roughly half of the S&P 500 has reported its results. According to FactSet, the blended earnings growth rate (actuals reported and estimates for companies that have not yet reported) is 2.2%. Excluding JPMorgan Chase (JPM), which had a big legal expense, the growth rate jumps to 4.7%. The blended revenue growth rate, meanwhile, is 2.0%.
In many respects this earnings reporting season has unfolded as a case of haves and have nots. Some companies, like Google (GOOG), Amazon.com (AMZN), Microsoft (MSFT), and Boeing (BA), have delivered the goods and have seen their stock prices rise handsomely. Other companies, like IBM (IBM), Stanley Black & Decker (SWK), Coach (COH), and Caterpillar (CAT), have not and have seen their stock prices hit hard as a result.
Still, the Fed put has been a staying factor that has enabled the market to look past disappointments and to magnify good news.
It is that so-called put, combined with a fear of missing out on another leg higher and the idea that underperforming money managers need to chase the market, that kept sellers at bay this week and emboldened participants to buy on the dip.
Those points notwithstanding, with the S&P 500 up 6.3% over the last 13 sessions, it should not come as a surprise to anyone if it relents to profit-taking activity in the near term.
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