After a string of ten winning sessions, including eight consecutive new all-time high closes, the Dow Jones Industrial Average fell on Friday, bringing an end to its longest winning streak since 1996. 

The Big Picture 

The S&P 500 index, a broader measure of the stock market, fell just two points shy of tying its all-time record close of 1565.  The NASDAQ, far from its all-time high, still managed to post weekly gains as did the Dow Jones Industrial Average and the S&P 500. 

Year-to-date, the Dow is better by nearly 11%, the S&P gaining 9.4% and the NASDAQ up 7.6% as the economy shows signs of improvement, corporate profits and coffers are flush and investors become more confident. 

However, the rally is showing signs of running out of steam and a pullback, correction or consolidation can’t be ruled out.  It would actually be very constructive for the market to take a breather before making the next move.  The next two weeks may offer the pause that refreshes. 

I, Investor 

The big news this week is the two-day Federal Open Market Committee meeting that starts Tuesday, March 19th and concludes Wednesday with a policy statement and a briefing by Chairman Bernanke.  Easy monetary policy, from low short-term interest rates to the continuing purchase of treasuries and mortgage-backed securities, is supporting equity prices here and globally.  Any change in that policy would have an impact on stocks. 

Economic fundamentals are supportive as well.  The latest employment report showed across the board strength in the labor market, not just in low wage occupations.  The housing market seems to have found a bottom and data this week and next may add even more encouragement.  Higher payroll taxes and gas prices haven’t hurt consumer spending or retail sales which soared 1.1% in February.

Metrics used to determine stock valuations are also supportive.  The S&P 500’s price/earnings ratio is at 14.8%, right in line with the average of 15% going all the way back to the 1870s.  With low interest rates, rising dividends and a pick up in buy-backs, stocks look very attractive relative to other assets.  Former Fed Chairman Alan Greenspan doesn’t see the kind of “irrational exuberance” now that we saw before the bursting of the bubble in 2000. 

Finally, the first week of April will usher in the start of the first-quarter earnings reports; no major surprises or disappointments have been telegraphed. 

The one major stumbling block remains the budget sequestration.  So far, cuts have had little visible impact, other than the closing of national parks and monuments and suspension of the White House tours.  But broad-based cuts in government spending will erode the economy from the bottom up.  Similar to Florida sinkholes, the cuts to seniors, the poor and aid to women, infants and children, preschool education and tuition aid to veterans, along with scheduled layoffs and furloughs for government workers and contractors, will chip away at the underlying economic foundation -consumer spending, revenues and economic growth. 

The end of March coincides with the Easter holiday.  With an early bond market close on Thursday, March 28th and all U.S. markets closed for the Good Friday holiday, investors and traders will see end-of-quarter positioning.  The next two weeks may determine whether we witness the death of this rally or a resurrection to new highs.

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