US stocks stumbled through the week on a mix of dull earnings and weak forecasts before encouraging data from both Beijing and Washington edged the indices to fresh multi-year highs on Friday.
The catalyst for Friday’s jump was a sharply narrowed US trade deficit in December — driven by both lower oil imports and rising oil exports — that pointed to a better economy in last year’s fourth quarter than data suggested. The government’s first estimate for the quarter was a 0.1 percent contraction, a surprise figure that took the wind out of markets after it came out on Jan. 30.
The smaller trade deficit “implies positive GDP growth for the fourth quarter,” economist Harm Bandholz of UniCredit said.
China’s trade and inflation data for last month also boosted markets: Its trade surplus gained and inflation was down, adding to evidence the world’s No. 2 economy is emerging from a drawn-out slowdown.
“These data suggest that external and domestic demand are both strong, which supports our view that the economy is on track for a cyclical recovery in the first half,” said Zhang Zhiwei (張志偉), a Hong Kong-based economist with Nomura International.
Friday’s gains took the S&P 500 to its highest level since November 2007, hitting 1,517.93, though up a mere 0.3 percent for the week. It was still well shy of the all-time closing high of 1,564.15, reached on Oct. 9, 2007, before the crash.
The Dow Jones Industrial Average closed at 13,992.97, down 0.1 percent for the week, but only after powering past the 14,022 level during trade on Friday, its highest level in five years as well.
The NASDAQ picked up 0.5 percent in the week, ending at 3,193.87. The tech-dominated exchange last saw Friday’s level in 2000 as markets plunged into the dot-com crash.
“The two factors pushing the market higher are funds flows and the Fed,” Peter Cecchini of Cantor Fitzgerald said.
The Fed is holding to its ultra-low interest rate, easy money policy, leaving savers with little place otherwise to put their money.
“So clearly the stock market has some pretty impressive tailwinds generated by the Fed. But we might expect a little bit of a pullback, to take a breather,” Cecchini said.
Other analysts also saw a pause ahead, with earnings season winding up and little clear direction in the economies of both the US and Europe.
“As the broad markets attempt to break free of this recent congestion, the volatility in Europe and retail sales could steal the headlines next week,” Joe Bell of Schaeffer’s Investment Research said.
Also looming was the massive snowstorm blasting through the US Northeast, which could tame some trading activity in the coming week after a blizzard halted air traffic in New York.
The markets face US political headwinds through the rest of February: the fight between Democrats and Republicans over whether to implement US$85 billion in budget cuts, the sequester, programmed to come into effect at the end of the month.
If allowed to go ahead, the sequester would crunch economic growth, even as it improved the country’s fiscal deficit.
US President Barack Obama wants more tax increases included in a compromise plan, but Republicans are balking.
“It seems likely that the sequester will take effect on 1 March,” Nomura said in a research note. “The initial effect on economic activity should be modest, but it will grow if the cuts remain in effect for more than a few weeks.”
Key data releases covering last month in the coming week include retail sales (Wednesday), industrial production (Friday) and consumer sentiment (Friday).