Dollars and Sense: The markets bounce back

The bull keeps charging. This is the bull market that won’t quit. The markets have set record after record for the past two years, even though—at least historically speaking—we normally get a bull-market correction about every 18 months. After peaking out on Sept. 18, the market drifted downward. This time last week, it had dropped about 6 or 7 percent, and lots of analysts were thinking we were headed for that correction. But then the market started rising again. It didn’t jump a lot, and there were some ups and downs last week, but the Dow is up 500 points from a week ago. Analysts still say this market is long overdue for a correction, but there’s less talk now that this is it.

Why the resilience? Lots of reasons. First, the good news. We’re now a couple of weeks into earnings season, and earnings generally have been pretty good. This past week we saw Apple, United Technologies, and Travelers beat earnings expectations. Companies set expectations so they can beat them, so that’s not unusual. In fact, historically, S&P 500 companies beat expectations 63 percent of the time. But last quarter, 70 percent of companies beat expectations. So far this quarter, about 67 percent of companies have beaten expectations. These indicators are underlying signs of health in the economy, or at least among publicly traded companies. We also got some good economic reports. Existing home sales for September rose 2.4 percent, topping expectations. September’s number means the annual rate of home sales should top 5.1 million this year, and that’s also better than previous estimates. And the weekly initial jobless claims report, out each Wednesday, showed claims rose 17,000 to 283,000. But the much more important four-week moving average dropped to 281,000, its lowest reading since May 2000.

The other news. But some of the causes of the rally are not so upbeat. I still don’t think we can discount the effect of the Federal Reserve’s stimulus. Interest rates remain artificially low compared to historical norms, and even though the Fed is not printing as much money as it was—in other words, it has toned down its bond-buying program—that program still hasn’t gone away completely. At some point, we’re going to have to pay for that, with inflation, taxes, or both. That said, it’s only fair to note the Labor Department said last week consumer prices rose only 0.1 percent last month, in line with expectations. The number suggests inflation at the retail level is under control.

Euro-blues. Last week, the European Central Bank (ECB) said it might do something similar to stimulate the eurozone, which brings us to another reason the U.S. markets are doing well: The United States has become one of the few safe houses in a bad neighborhood. When the ECB suggested it might resort to a bond-buying program, it was an admission of just how bad things are getting in some eurozone countries. China’s growth, which has been more than 8 percent for years, is now projected to be about 7.3 percent this year. That’s a five-year low. In the short term, we might continue to see more off-shore money coming into the U.S. markets, but I think it’s important to note that in the long run, this is not good for America. All these countries are important trading partners, and we can’t do well in the long-run unless they do well, too.

The week ahead. Third quarter earnings season continues, and if the trends hold up, this will be the second quarter in a row in which the markets as a whole beat expectations. That likely will take some of the jitters out of the markets. The week also brings a pretty full slate of government reports. Lots of analysts will be watching the Commerce Department’s first estimate of gross domestic product growth, due Thursday. The Conference Board will release its October consumer confidence number on Tuesday. September’s durable goods report also comes out on Tuesday. None of these are blockbuster reports, but if they’re all pointed in the same direction, the markets have a history of moving that way too.