Expanding on the rally that began the previous Thursday, U.S. stocks strung together their best weekly gains in 2014 last week. The rally erased most of this year's losses caused by emerging-market turmoil and softer economic data. Bullish investors increasingly dismissed this year’s economic weakness as weather-related disruptions masking ongoing recovery.
The key fuel for the rally, though, was provided by Janet Yellen's first appearance before Congress as the Fed Chairwoman, replacing Ben Bernanke after eight years at the helm. Yellen is a known commodity to financial markets, having served as the Fed's Vice Chair since 2010 and the President of the San Francisco Fed prior to that. Markets liked what they heard from Mrs. Yellen as she delivered both continuity of policy and consistency of message with other recent Fed communication. The bulls also applauded some better-than-expected Eurozone GDP data with the French, German and Dutch economies all providing positive surprises.
For the week, the S&P 500 gained 2.32%, the Dow increased 2.28%, and the MSCI EAFE (developed international) added 2.48%.
Here are the 3 stories this week that rose above the noise:
Is Shrinking Stock Market a Bullish Sign?
Adam Shell, writing in the USA TODAY, details an interesting phenomenon that has developed in the U.S. equity market over the past 15 years, which is a shrinking number of publicly traded companies. The article examines theories behind the decline in public companies, including two severe bear markets and regulatory changes, along with discussing the possibility that the shrinking supply of public companies has had a positive impact on stock prices. Ultimately, in our view, the long-term value of companies is likely to be determined by future free cash flows rather than changes in the number of public vs. private firms or a trend toward fewer and larger publicly traded companies. Nonetheless, the reduction in the number of public firms may have played a cyclical role in recent market gains and may contribute to continued short-term improvement in investor sentiment toward the equity market.
Emerging Stocks Rise to Three-Week High on Record China Lending
Despite a strong performance from developed market equity indices last year, emerging stocks posted negative performance and have lagged this year, as well. Since emerging economies represent about half of global GDP, investors are watching performance of their stock markets in 2014 as a potential leading indicator of the health of the global economy. In this regard, the rebound in emerging equities to a three-week high last week was encouraging. A Bloomberg article recaps some of the reasons behind the rally which included record Chinese lending. The Chinese credit figures helped the Shanghai Composite Index erase a slump of as much as 5.9% this year.
Forget High Prices, Gasoline Demand to Fall
Bank of America-Merrill Lynch recently came out with research projecting a fall in gasoline prices based on a variety of factors. In the short term, they cite weakening economic data as a catalyst for falling gasoline prices. Over the long term, there may be downward pressure on gasoline prices because of stricter vehicle fuel standards and rising gasoline inventories from increased oil production. As stated in the article, most of the new cars in the U.S. are getting 18% more miles per gallon than cars produced in 2007. Despite the recovery in the U.S. economy, demand for gasoline has remained relatively flat because of improving fuel efficiency. Weaker demand will keep a lid on fuel prices and ultimately be a catalyst for stronger economic growth.
Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.
