Better Business or Overstimulated? Nasdaq Trips Over 4,000

Stock Market

Source: http://www.flickr.com/photos/teegardin/

In early trading on Monday, the tech-heavy Nasdaq index climbed 15.44 points to 4,007.09, its highest level since September 2000, when the index was on its way down from the height of the dot-com bubble. The news marks a superficially significant milestone in the market’s broad-based rally over the past year, as the Nasdaq joins the Dow Jones Industrial Average and the S&P 500 in hitting fresh landmarks. This year to date, the Nasdaq has climbed more than 28 percent, the Dow is up nearly 20 percent, and the S&P 500 is up more than 23 percent.

The market rally has been supported by a number of tailwinds. First and perhaps foremost has been the accommodative monetary policy championed by the U.S. Federal Reserve in the past several years. The Fed reduced the target federal funds rate to the zero bound in 2008 and shortly thereafter launched the first round of quantitative easing. Today, the Fed is engaged in its third discrete round of QE through which it is purchasing $85 billion in agency mortgage-backed securities and longer-term Treasuries each month.

One side effect of this stimulus is lower real interest rates, which increases equity valuations as investors reach for yield in stocks. The low-rate environment has also encouraged spending in interest-rate sensitive businesses, which has led to a real pick-up in business activity. This, in turn, supports equity valuations.

The AAII Investor Sentiment Survey for the week ended November 20 shows that 34.4 percent (down 4.8 percent from last week) of investors are bullish on the stock market over the next six months, while 36.1 percent (up 2.8 percent) are neutral and 29.5 percent (up 2 percent) are bearish. This compares against long-term averages of 39 percent bullish, 30.5 percent neutral, and 30.5 percent bearish.

The survey suggests that although many investors are bullish, more are unsure what to expect from the market. There is a lot of concern that equities could be plodding through a stimulus-fueled bubble, but price-to-earnings ratios for the indexes are not really out of whack. The Nasdaq is trading at a P/E of about 26 as of November 25, while the S&P 500 is at about 20.

Some top performers for the Nasdaq on Monday were Sears Holding Corp. (NASDAQ:SHLD), up 5.6 percent in afternoon trading, Amarin Corp. (NASDAQ:AMRN), up 5.12 percent, and Dynavax Technologies (NASDAQ:DVAX), up about 5 percent.

Trading this week is expected to be fairly tame given the Thanksgiving holiday on Thursday and the short trading day on Friday.

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