With the Dow Jones Industrial Average at a record and the S&P 500 Index near an all-time high, investors are worried about stocks being too expensive. But, even so, they’re equally as anxious in missing out on further gains, thanks to the Federal Reserve’s easy-money policy.
More than half of money managers have missed the rally this year and, as a result, are underperforming their benchmarks. They’ve learned the hard way that sitting on the sidelines is a risk in itself.
So now, strangely, investors are weighing the possibility that a stronger economy may be bad for stocks. Because that could mean an end to the Fed’s $3 trillion-plus stimulus program.
Case in point, Thursday’s better-than-expected GDP report (2.8% growth vs. 2% consensus) triggered a sell-off in the stock market.
And Friday, with news of the U.S labor market creating 204,000 new jobs (compared with expectations of 120,000), the futures market tanked.
After looking more closely at the report and finding it more of a mixed bag, investors once again pushed up equities — see the chart above. (The labor force participation rate is at its lowest level since March 1978.)
Also positive was an inflation report showing a reading of 1.2%, well below the Fed’s target of 2%.
So after a short scare that the economy is improving, the rally is on again.
The Money and Markets Research Team