Dollars and Sense: Moving past the Fed's market influence

Stocks still up. The major stock indexes all closed the second quarter higher and the Dow posted its strongest first-half performance since 1999. So far for the year, the Dow has surged more than 14 percent, while the S&P 500 and Nasdaq are both up more than 13 percent each. It’s also worth noting that in the first week of the new quarter, stocks were higher on Monday, Tuesday, and on a shortened trading day Wednesday. When the quarter starts out like that, it’s a good indication investors are not yet retreating.

No changes, but … Regular readers of this column know I’ve been warning you that it’s been the Federal Reserve’s policy of low interest rates and bond buying—which artificially pours money into the economy—causing this stock market rise. All previous warnings are still in effect. But it’s beginning to appear that when we get good economic news, the markets go up, and when we get bad news, the markets go down. That’s a good sign that underlying market fundamentals, and not Fed policy, are regaining control of the markets.

Good news. And we did get some good economic news this week. The Institute for Supply Management said manufacturing activity is expanding, though slowly, and a Commerce Department report said construction spending was up in May to its highest level in four years. Factory orders increased 2.1 percent in May, up from a 1.3 percent gain in April. New orders for manufactured goods have increased during three of the last four months. Also helping the markets were reports from Ford and GM that automobile sales have rebounded to pre-Great Recession levels.

Eyes on the rise. But the report everyone was looking for was the June unemployment report, released today. And even though the unemployment rate was unchanged, at 7.6 percent, the economy created 195,000 new jobs, significantly better than expected, and much better than payroll processor ADP’s estimate earlier in the week. The Labor Department said new claims for unemployment fell to 343,000, a level that can produce sustained job creation.

What’s ahead? It’s a quiet week for government reports, but we begin third quarter earnings season. Because of the holiday last week, and the way the calendar has fallen, we won’t get a lot of reports this week, but likely enough to give the markets some direction. Alcoa usually kicks off the season, and they’re considered a good indicator of how manufacturing and the global economy is going. Analysts will be watching the price to earnings ratio. With the big run-up in the price of stocks this year, analysts and investors are going to want to see earnings growing at a rate to sustain those prices. If they like what they see, you can expect this rally to continue.