Can The Bullish Fireworks Continue In The Second Half Of 2014?

Investors saw some bullish fireworks as the Dow exploded past 17,000 for the first time last week just before they checked out to celebrate the Fourth of July.

#-ad_banner-#The breaching of this psychologically significant threshold is quite a feat for a market that just five years ago was knocked silly by the worst economic downturn since the Great Depression. In fact, the Dow closed at 8,280.74 before Independence Day in 2009. That means that the Dow has more than doubled in five years.

So far in 2014, the bull market has not only been in stocks, it’s also been in bonds and commodities. This is an unusual situation, because usually when stock prices rise, bond prices falter, and/or commodity prices fall. Sure, stocks, bonds and commodities can move up together for short periods of time, but through the first half of 2014, all three asset classes are higher, which hasn’t occurred since 1993.

In the first six months of 2014, the S&P 500 index rose 6.1%. Commodities, as measured by the PowerShares DB Commodity Index Tracking (NYSE: DBC), saw a year-to-date gain of 3.4%. And bonds, as measured by the iShares 20+ Year Treasury Bond (NYSE: TLT), spiked 11.5%. 

The rise in bond prices is particularly eye-opening, because at the beginning of the year most market followers, myself included, thought bond yields would rise and bond prices would fall.

Given all of the bullishness we’ve seen through the first half of the year, the question now for traders is, will the bullish fireworks continue in the second half?

Trying to answer this type of question with certitude is a fool’s task, and anyone who has been in the financial punditry game for any length of time can tell you that as soon as you make too confident a call on market direction, you tend to get humbled quickly. Yet, with that caveat in mind, I do think the bull has some strong tailwinds at its back capable of keeping it running for the rest of 2014. 

First, the Federal Reserve is likely to continue to decrease its bond-buying program at the current rate of $10 billion per month. This makes the Fed a “known quantity,” and something traders can largely cease worrying about. 

More importantly, we can say with confidence that the Fed funds rate — the interest rate controlled by the Fed — will remain at current near-zero levels until at least mid-2015. With interest rates likely to remain low, more money will move into stocks in search of alpha.

The second bullish tailwind here is the improved labor market. On Thursday, the Labor Department reported that U.S. employers added a seasonally adjusted 288,000 jobs in June, well above consensus expectations. The unemployment rate fell to 6.1% last month, its lowest level since September 2008. 

Now, I am not of the opinion that the jobs situation in this country is great — far from it. I do, however, think that the numbers indicate a slight improvement that, if continued in the months to come, will help give investors confidence to keep buying.

Finally, the Fed isn’t the only central bank around the world that’s being uber accommodative. The European Central Bank has put in place so-called “negative interest rates” designed to spur on capital investment in the region. Then there is the Bank of Japan, which continues to implement “Abenomics,” a plan by Prime Minister Shinzo Abe to reflate the Japanese economy via monetary stimulus. 

It is for these reasons that I think there is a very good chance that stocks will continue to move higher for the remainder of 2014. 

Sure, we could see a pullback here caused by any number of factors, including rising geopolitical tensions in hotspots such as Iraq or Ukraine. We also could get more downbeat GDP numbers, such as the revised Q1 metric showing the economy contracted at a rate of 2.9% in the first three months of the year. Yet, I suspect that the tailwinds present are stronger than the headwinds, and that means a bullish milieu for traders. 

So, get your buy lists ready — the 2014 bullish fireworks aren’t finished yet.

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Can the Bullish Fireworks Continue in the Second Half of 2014?