Yellen Gives Green Light to More Stock Gains

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Susan Walsh/APFederal Reserve Chair Janet Yellen speaks during a news conference at the Federal Reserve in Washington on Wednesday.
By Luciana Lopez and Jennifer Ablan

NEW YORK -- Federal Reserve chief Janet Yellen signaled that rational exuberance is just fine.

That, at least, is how some of America's largest money managers interpreted her comments on Wednesday suggesting interest rates will remain low through 2016.

It reinforced their views that easy money means the U.S. stock market rally has further to run despite notching a series of record highs already this year. That could easily put the S&P 500 benchmark on track to surpass 2000 for the first time, and to do so well before the end of the year.

Such a gain for 2014, after a 30 percent rise in 2013, would surprise those who worried that stocks might be getting overvalued and were due for a sizable pullback.

One reason for increasing confidence is that the resilience of the market has been very strong in the face of various shocks this year. A combination of an improving economy, rising earnings, and the cheap borrowing costs, has made that possible.

Stock investors have shaken off last year's budget uncertainty in Washington, a sharp drop in high-growth technology companies and biotech shares, the conflict in Ukraine, and more recently the apparent tearing apart of Iraq that resulted in a spike in oil prices.

"What I have is a sweet combination of a self-sustaining, long lasting economic expansion joined with a long-lasting monetary accommodation," said Steven Einhorn, vice chairman of Leon Cooperman's hedge fund Omega Advisors, which has $10.5 billion in assets under management.

"I don't think this bull market is over," he said, adding he estimates stocks could rise another 3 to 5 percent this year.

That may sound modest but when added to an average S&P 500 dividend yield of 2 percent, it looks pretty attractive against the 2.62 percent yield of a 10-year Treasury note.

Fund Flows

Yellen on Wednesday said interest rates could stay "well below longer-run normal values at the end of 2016," leading to further gains in stock prices that on Thursday pushed the S&P 500 to a new record. The S&P 500 (^GPSC) gained 2.50 points or 0.13 percent, to close at 1,959.48.

While the Fed lowered some of its economic forecasts, Yellen nonetheless cited reasons for optimism about the world's biggest economy, including resilient household spending and an improving jobs market.

Even if the market closed the year at this level it would mark the best three-year run for U.S. stocks since the 1997-1999 period.

That's driven greater household interest in equities. Retail investors have dropped $61 billion into U.S.-based stock funds this year, according to Lipper.

Tom Nally, a president at TD Ameritrade Institutional (AMTD), told the Reuters Global Wealth Management Summit on Wednesday that retail clients have an average of 19 percent of their assets in cash, slightly below the historical average of 20 to 25 percent. Advisers working with the firm are even more bullish -- with 8 percent of their clients' assets in cash.

"We still think we are in one of the biggest bull markets of our careers," said Rich Bernstein, founder of Richard Bernstein Advisors in New York, and a former top Merrill Lynch investment strategist.

Beyond a Bad Winter

While first-quarter growth disappointed, economists say the effects of unusually bad winter weather will fade later this year. Expectations for corporate earnings growth have improved, with 2014 earnings expected to grow at 9.1 percent, up from 8.7 percent on April 1, according to Thomson Reuters data.

Several fund managers said the slowness of the economic expansion may work in favor of the slow grind higher in stocks. The languid pace has prevented over-enthusiastic expectations from investors and the buildup of fixed-cost investments that "sow the seeds for the next recession," Bernstein said.

"It is simply too early in this business expansion for shares to peak," said Einhorn. "If I'm correct that this particular economic expansion has years to go, then this bull market should have a good deal of time and price left in it."

What's been striking about the rally is, in a sense, just how boring it has become. The S&P 500 (^GPSC) hasn't closed up or down by more than 1 percent in 43 consecutive trading days, the longest streak since 1995, said Antony Filippo, a Toronto-based independent investment manager.

The CBOE Volatility index closed at its lowest in more than seven years Wednesday. To some, this suggests investors have become "complacent," that is, ignoring potential problems that could derail a rally, but a number of strategists suggested that just because investors aren't paying for protection does not mean they don't have worries.

"You always want to be on guard for excesses ... but as it stands now the bias does appear to be toward the upside," said Dan Greenhaus, chief strategist at BTIG, who sees the S&P 500 at 1980 by year-end.

Some Risks

The year's strongest performers are a mix of defensive stocks with high dividends, like utilities -- which have risen 14 percent -- and growth areas like health care, technology and energy. The consumer discretionary sector -- which includes many retailers -- is the only one that is in the red this year, suggesting concern about the path of spending.

If inflation picks up as growth remains stagnant, that would give investors pause. Core U.S. consumer prices have risen 2 percent over the last year, and if the inflation rate went much higher it could put pressure on the Fed to consider moving more rapidly to raise rates.

%VIRTUAL-article-sponsoredlinks%"If the Fed had to get more hawkish quickly it's going to be a problem for the market, and lead to an abrupt end of low volatility -- we are vulnerable to a shock," said Russ Koesterich, chief investment strategist for Blackrock (BLK), which has more than $4 trillion in assets under management.

Some measures suggest stocks are a little expensive: The current forward price to earnings ratio, at 15.6, is higher than the 10-year average of 13.8, according to Thomson Reuters data.

Stocks could peter out when the Fed finally begins raising interest rates and the excess fueling equities' gains is gone.

"When the Fed starts shifting toward maybe hiking rates, then you say, 'Okay, do I have to rethink how I'm allocated here?' " Greenhaus said.

But many investors see plenty of time to take the bullish road before having to worry about that.

"What's there to not like?" asked Karyn Cavanaugh, senior market strategist at Voya Investment Management in New York, which has $215 billion in assets under management.

Cavanaugh, who sees the S&P ending the year around 2020, added: "There's nothing out there that's really going to derail this market."

-Additional reporting by David Gaffen and David Randall.

9 Numbers That'll Tell You How the Economy's Really Doing
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Yellen Gives Green Light to More Stock Gains
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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