Market Rises Despite Sequestration Fears And Doomsday Warnings

Includes: EWI, IVV, SPY
by: Louis Navellier

Last Monday, the market got off to a bad start due to Italy's bizarre election results, but Fed Chairman Bernanke's testimony before Congress lifted the market on Tuesday. By the end of the week, the Dow closed up 0.6%, near a new record high, and the S&P 500 rose 0.2%, registering its 8th rise in the first nine weeks of 2013. As I predicted here last week, the stock market rose during Friday's sequestration. Despite dire warnings of job cuts, fears of a collapsing economy were grossly exaggerated.

The Comedy, Farce, and Tragedy of Italy's Latest Election

The U.S. stock market woke up on the wrong side of the bed last Monday morning after Italian voters elected a left-wing alliance in the Lower House, clearly rejecting outgoing Prime Minister Mario Monti's austerity reforms. We also saw a surprisingly strong showing by a former comedian, Beppe Grillo, whose anti-austerity "Five Star" movement won 25.5% of the overall vote. No party won enough votes to form a majority in the Senate, so it looks like we'll see another round of elections in May. For now, it looks like we'll see a power contest between a left-wing comic and 76-year-old center-right former Prime Minister Silvio Berlusconi, who is plagued with allegations of criminal contacts and sex scandals.

The unemployment rate in Italy surged to 11.7% in January (up from 11.3% in December), the highest rate in 21 years. That's one reason so many Italians are unwilling to make the sacrifices required for the austerity cuts. Since Italian voters have clearly rejected austerity, the prospects of another euro-zone debt crisis are reviving. Beppe Grillo's Five Star protest movement is not just anti-austerity. He is calling for a return of the Italian lira and a fundamental restructuring of Italy's massive public debt. Protest votes for Five Star candidates clearly send a signal to Brussels that most Italians do not want to continue with the kind of stern reforms dictated by euro-zone bureaucrats. With Italy now a wild-card in the euro-zone, it will be interesting to see just how the European Central Bank will respond to this growing crisis.

The good news for American investors is that the U.S. stock market staged a quick turnaround Tuesday, which means that the U.S. market may finally be overcoming its obsession with European politics. This is also a good sign that there is plenty of cash on the sidelines waiting to pour into the stock market on any big dip. Perhaps that's because the U.S. is taking the opposite road from Europe - no austerity here.

Chairman Bernanke's Spirited Testimony Lifts the Market

One of the catalysts for the stock market's abrupt turnaround on Tuesday was Fed Chairman Ben Bernanke's testimony before Congress to defend the Fed's unprecedented asset purchases of $85 billion per month. His most fascinating comment came when he said that the Fed's policies are increasing global demand and "helping not only our businesses but the businesses in other countries that export to us." In other words, Bernanke feels that the Fed's responsibility is not limited to helping America, but he must save the global economy too.

Another interesting exchange with Congress came when Tennessee Senator Bob Corker called the Fed Chairman a "dove." Bernanke responded by saying that "Well, maybe in some respects I am [a dove], but on the other hand my inflation record is the best of any Federal Reserve chairman in the postwar period."

I found it fascinating that Mr. Bernanke said that "in the current economic environment, the benefits of asset purchases are clear." Translated from Fedspeak, he was saying that they cannot turn off the money pump or interest rates would soar. As for the stock market, Bernanke said, "I don't see much evidence of an equity bubble," since "earnings are very high, and equity holders are risk-averse in their behavior."

The bottom line is that Chairman Bernanke is a proud "dove" who is now saving the world. He also left the impression that the Fed would likely continue Quantitative Easing until 2016, three more years. With the perception that the Fed's pump-priming might be perpetual, the stock market favored the upside.

Federal Spending Cuts Boost the Economy and Stocks

Some of last week's economic headlines looked pretty dismal, but the details were mostly positive.

On Tuesday, we learned that the S&P/Case-Shiller 20-city index rose 0.2% in December and 6.8% for all of 2012. Also on Tuesday, the Commerce Department reported that the sales of new homes rose 15.6% in January to an annual rate of 437,000, 14% above economists' expectations of 384,000 and the highest annual pace since July 2008. Later in the week, we learned that foreclosure-related sales fell 6% last year.

On Wednesday, the Commerce Department reported that orders for durable goods fell 5.2% in January, but the details were more positive: Excluding the volatile transportation sector, durable goods orders rose 1.9%. Machinery orders surged 13.5% and core capital goods rose 6.3%, the largest gain in two years.

On Thursday, the Commerce Department revised its fourth quarter GDP estimate from a 0.1% decline to a 0.1% rise, but most of the decline came from a drop in government spending, which is a positive sign. Federal outlays fell at a 14.8% rate last quarter, including the largest drop in military spending since 1972, but construction spending on new homes rose 17.5% and consumer spending rose at a 2.1% annual rate.

On Friday, the Institute of Supply Management [ISM] announced that its manufacturing index rose to 54.2 in January, up from 53.1 in December, as 15 of the 18 surveyed industries reported growth. The ISM new orders index rose to 57.8 in January, up from 53.3 in December, while the ISM production index rose to 57.6 in January, up from 53.6 in December. Inventories were very low at the end of 2012, so much of this manufacturing resurgence is likely related to inventory replenishment in early 2013.

Despite all the threatened layoffs from Friday's sequestration cuts, the news on the jobs front was positive last week. On Thursday, the Labor Department reported that new claims for unemployment fell 22,000 in the latest week to 344,000, far below economists' consensus estimate of 362,000. The four-week moving average fell 6,750 to 355,000. This bodes well for next Wednesday's ADP payroll report and Friday's payroll report.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.