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The Markets This Week

February 18, 2014 | Weekly Commentary

Investors ignored weak economic data last week and bid up stocks to nearly the record-high levels reached at the end of 2013. Buoyant major indexes rose more than 2% from the previous Friday’s close.

A good season of fourth-quarter earnings reports and reassuring policy talk from new Federal Reserve Chair Janet Yellen dispelled potential worries about the pace of U.S. economic growth, which had gripped the market since late January.

Given the figures, there could have been plenty of concern: The Fed said Friday that January’s industrial production fell 0.3%, the first drop since last July and weaker than the plus-0.2% consensus projection. Meanwhile, retail sales fell 0.4% last month, below expectations of a flat month. For now, severe weather in much of the country this winter is the convenient fall guy, but soon enough it mightn’t be.

On the week, the Dow Jones Industrial Average tacked on 2.3%, or 360 points, to 16,154.39. The Standard & Poor’s 500 index rose 42 points to 1838.63, within spitting distance of the 1848.38 record high. The Nasdaq Composite index rose 118 points, or 2.9%, to 4244.03.

“Reasonably good fourth-quarter earnings [indicating] 9% growth” helped propel stocks,” says Joseph Amato, chief investment officer of Neuberger Berman. Yellen’s remarks Tuesday about the “continuity” of accommodative policy also helped calm nerves that otherwise might have been jittery due to the economic data.

Additional rally ammunition, adds Rick Fier, a trader at Conifer Securities, came in the form of improving European economic figures—albeit from low levels—as well as from a stabilizing bond market last week and relatively quiescent emerging markets. Fourth quarter euro-zone gross domestic product growth was a tepid 0.3%, but it beat forecasts. It feels like the selling pressure is exhausted for now, he adds.

The market is discounting those soft economic numbers, but next week, Amato says, will bring a new leg of data, with a number of early indications of February purchasing-manager indexes from the U.S. and euro zone. To break out of the trading range the market has been in—roughly 1750 to 1850 on the S&P 500 index—”we need a clearer sense of where the economy is going,” says Amato.

The big surge late last year might have made investors forget that there have been relatively lengthy periods inside this bull market in which stocks traded in a narrow range. “We’ve gone through sideways periods of four months or more in 2012, and even in 2013,” says Dan Greenhaus, chief global strategist at brokerage firm BTIG.   (Source:  Barrons Online).

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