Daily Gains Letter

What I’d Consider Buying as the Market Moves Higher Again

By for Daily Gains Letter |

Consider Buying as the Market Moves HigherThe stock market appears anxious to move higher to new record highs.

In the past week, the Federal Reserve released its Federal Open Market Committee (FOMC) meeting minutes that suggested it wanted to see stronger, sustained growth before deciding on when to raise interest rates. This includes both economic growth and jobs creation.

On Thursday, the Bureau of Economic Analysis (BEA) will report the second reading of the second-quarter gross domestic product (GDP), which came in at a surprising annualized four percent for the advance reading.

The consensus is that the second reading will show the GDP growth holding at the same four-percent level. If it does, it would be excellent for the economy but at the same time, ironically, it would make investors and the stock market nervous about the status of interest rates.

The issue is that the Fed wants to see controlled and steady economic growth and a four-percent reading could raise red flags, pointing to inflation—which means higher interest rates. The inflation rate is benign at this time as consumers continue to hold back on spending.

The stock market will get anxious if the reading remains the same, but we would want to wait to see how the economy fares in the third and fourth quarters of the year before making any drastic moves.

Of course, the stock market is all about expectations going forward and clearly, a strong second reading of the 2Q14 GDP will send some to the exits.

The Fed also wants to see the jobs market continue to expand at its previous trend of generating an average of more than 200,000 monthly jobs, while also maintaining the unemployment rate at less than 6.5%, which were its previous targets to meet before upping interest rates.

Strong and sustained jobs growth will help to continue to push up the housing market, which, after a recent lag, produced strong annualized growth of more than one billion units for both housing starts and building permits in July. These are excellent numbers that point to a healthy housing market, which in turn could drive consumer spending on durable goods.

As I said, investors need to be careful as the stock market reaches higher to new records; higher interest rates are around the corner and they will pressure stocks and raise bond yields.

Now, despite the reality of higher rates around the corner, I’m still positive on the stock market being able to move higher as long as the economic renewal and corporate profits also grow. In the past, higher interest rates have co-existed with higher stock market gains and there’s no reason to expect something otherwise this time around. As long as rates don’t surge up too quickly, things should be okay with investing in the stock market.

As such, I recommend you only add stock market positions on weakness in stocks and stock market indices; look for such exchange-traded funds (ETFs) as SPDR S&P 500 (NYSEArca/SPY) and PowerShares QQQ (NASDAQ/QQQ).

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