Dow Jones' New Milestone

On Thursday the Dow Jones industrial average(^DJI) index punched through the 17,000 benchmark for the first time ever, closing at a record 17,068. This was mainly due to the strong job market figures that were presented.

New official figures showed an extra 288,000 new jobs in the month of June, helping the unemployment rate reach a new low of 6.1%, the lowest level since September 2008, providing evidence to believe that business recovers from freezing weather and has gained momentum of the drag at the beginning of this year.

The U.S. continues to be among the leaders of the wider global recovery, and these non-farm payrolls should be supportive for equities in general. 

- Nick Peters, portfolio manager at Fidelity Solutions

Overvalued or not?

The overall bull market has lasted nearly 64 months, making it the fourth longest since the crash of 1929. In recent years, the US stock market has substantially outperformed those of Europe, Japan, and China. Surprising about this recent bull-market is that it takes places during economic inertia. Whereas previous rallies in the 1990s and 2000s were accompanied by growth figures or around 3 percent current rate, current rates are only half of this.

Disagreement among investors

The odd thing is that if we look at the bond market, we see investors painting a different picture. The market can be described as very cautious; bond yields have fallen this year. This can indicate that investors believe that the Fed will have to keep interest rates low to prevent the economy from stalling.

Last Thursday, the 10-year Treasury note closed with a yield of 2.65 percent, whereas it was a little over 3 percent at the end of last year.

In the bond market, Traders currently price an official overnight rate of 0.7 percent for the end of next year, rising to 1.70 per cent 12 months later/

This demonstrates that bond investors are skeptical about the economic recovery and rightly so, because we saw a weak economy in the first quarter.

- Timothy M. Ghriskey of Solaris Asset Management

As the economy recovers, the Fed is gradually injecting less money into the financial system. If profits and the economy grow robustly, stock market investors may not care that there is less monetary stimulus, but if the withdrawal causes a tightening in financial conditions, the appetite for stocks might dwindle.

Pessimists & optimists

The main question for the skeptics is whether the rally has made stocks overvalued and potentially vulnerable to a decline. The problem is that there are many measures to indicate whether stocks are overpriced or not. Additionally, bullish and bearish investors use very different yardsticks for measuring valuations.

For example, as an optimistic one can note that the stock market value of the companies in the S&P 500 is 16.5 times the 2014 profits that analysts expect for those firms. This ratio is not particularly high by historical standards, although higher than average.

Skeptics, on the other hand, note that using longer-term comparisons of earnings and stock prices, including the Schiller P/E ratios stocks are trading closely to the valuations they had before plunging in 2008.

Concluding

The only facts are that American stocks are rising to new heights during these economic questionable times. Bond market investors seem to expect that the current low Fed rates might continue longer than the Fed itself indicates. Whether this will be as good for the stock markets as it has been for the last couple of years, I, of course, cannot say.

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Gelein.huiskes

Gelein Huiskes

Gelein has been interested in the financial world and global economics since high school. For over 3 years he has been a member of a university investment team, of which one year he was the treasurer.

This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions.

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