Stock Market Reaches For New Highs Even As Risks Rise

bearbullSy Harding: The stock market took advantage of the lack of economic reports this week to rally back toward its bull market highs.

The previous week’s economic reports, particularly the dismal employment report last Friday, were forgotten as the threat of a military strike against Syria faded.

Concerns about the Fed dialing back its QE stimulus remained in the air. But that worry retreated also. The consensus opinion is that the weak employment report will force the Fed to do very little if anything except emphasize its intentions to do no harm by taking it slow and easy with any taper.

Meanwhile, ignored by the market, the economic risks worsened.

Even though there were very few economic reports this week, what there were did not paint an encouraging picture.

It was reported Friday that Retail Sales were positive by only 0.2% in August, the smallest increase since April, and less than half the consensus forecast for a 0.5% improvement. The University of Michigan/Thomson Reuters Consumer Sentiment Index plunged from 82.1 in August to 76.8 in September, a five-month low. The Producer Price Index was up an unexpected 0.3% in August on the back of higher food and energy costs. And the Mortgage Bankers Association reported that mortgage applications fell by 13.5% last week.

Against that backdrop, next week returns to a normal schedule of important economic reports, including the first look at the housing industry in a while, with the Housing Market Index, New Housing Starts, permits for future starts, and Existing Home Sales.

And the Fed’s highly anticipated ‘will it or won’t it’ September FOMC meeting will begin on Tuesday, with its QE taper decision being announced on Wednesday, and Chairman Bernanke’s often provocative press conference following after the announcement.

Can Chairman Bernanke pull off the potentially confusing balancing act of lowering the Fed’s economic growth estimates again, as it’s expected the recent economic reports will force it to do, while at the same time convincing markets that the QE stimulus, which has been the main support for the economy for five years, can now be safely dialed back?

Meanwhile, on the market’s continuing rally, Goldman Sachs reported that the market’s gains this year have been driven much more by the expansion of Price/Earnings multiples than earnings themselves. That is, the willingness of investors to pay higher prices for stocks regardless of slowing earnings growth. The report notes that of the S&P 500’s 18% gain this year, only 5% is related to earnings, and 13% due to an increase in the Price/Earnings multiple investors are willing to pay.

Will so-called smart money continue to be wrong with their concerns over such situations, while public investors have been so right in pouring money into mutual funds and ETF’s at a near record pace this year?

That divergence in expectations apparently continues.

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