Stocks Soar ...
Stocks rallied last week on better U.S. economic data and optimism for further monetary accommodation in Europe. The Dow Jones Industrial Average added 2.03% to close the week at 17,001, the S&P 500 Index rose 1.71% to 1,988 and the Nasdaq Composite Index advanced 1.65% to 4,539. Meanwhile, the yield on the 10-year Treasury rose from 2.35% to 2.41%, as its price correspondingly fell.
The stock market continues to wrestle with a series of counterforces, and for now, low rates and an improving U.S. economy are trumping full valuations and lingering geopolitical risks, allowing stocks to move higher. In fact, it is not stocks, but some of the safe haven assets — notably gold and short- to intermediate-duration U.S. Treasuries — that may be the most vulnerable in the near term as a period of interest rate normalization approaches.
... Both Thanks to and in Spite of Economic News
As markets have stabilized over the past couple of weeks, investors appear to be recommitting to equities. We saw $17.9 billion flow into equity funds last week amid a rally that was led by U.S. and European stocks.
Ironically, last week’s gains were driven by tangible evidence of an economic acceleration in the United States and the exact opposite in Europe. In the U.S., most of last week’s data confirmed that the second half of the year should be stronger than the first. Housing starts surged in July to a better-than-expected 1.1 million, helped by a drop in mortgage rates (30-year conventional mortgage rates are down 0.40% from the start of the year). At the same time, existing home sales rose to a 10-month high. Additionally, in a further sign of improvement in the labor market, continuing jobless claims fell to the lowest level in more than seven years.
In contrast, European equities — which narrowly outperformed the United States — rose despite slowing euro-area manufacturing. Investors, it seems, put a positive spin on further weakness, hoping it might lead to more aggressive action by the European Central Bank (ECB). It’s another example of the “bad news is good news” phenomenon we remarked on last week.