Nasdaq extends its rally for the ninth straight day as S&P and DJIA are little changed. S&P falls less than a point to 2,109, DJIA falls .1% to 18,116, and Nasdaq adds .1% which is within 1.7% of a record that was reached at the peak of the tech boom. Markets will continue to move primarily with Europe, OPEC, and the Fed, which could possibly leave the market without much direction. VIX rises to 14.56 as the ten year yield falls 7 basis points to 2.06%. The euro depreciates against the dollar to $1.13 as does the rouble which follows S&P’s downgrade of their debt to junk. Tomorrow Janet Yellen should provide some insight into the strength of the U.S. economy and give forward guidance on interest rates. The use of the word “patient” will be a significant clue regarding the timing of interest rate increases. If the Fed wants to maintain the possibility of a June rate hike, it will have to drop the term from forward guidance.
Analysts believe that Greece will have a hard time balancing demands between its bailout creditors and the political demands of Greek voters, who don’t like the compromises that Greece made to creditors. Friday’s deal gives Greece four months to come up with an action plans that is acceptable to both their constituents and their bailout creditors. However various European bonds respond positively to Friday’s news with yields in Greece, Spain, Italy, and Portugal all falling. Contributing to these movements, was S&P rating agency saying that it assumes that Greece will not exit the eurozone nor default on their debt. However analysts at S&P rival Moody’s is quick to note that if S&P’s assumptions are wrong then the impact could be significant, and they also have a more cautious outlook compared to S&P regarding the financial burden that would result from a Grexit.
Goldman Sachs strategists believe that equity values are currently “stretched” and it is hard to find stocks with an attractive valuation. Equity strategist David Kostin notes that the only time in the past 40 years that stocks traded at higher multiples was during the tech bubble. If the Nasdaq increases by 2% then the index will beat the record set during the tech bubble. Although this sounds ominous, since the Fed mentioned stretched valuations over the summer the S&P has risen 7%. These strategists believe that the S&P 500 will end the year around 2,100 which suggests that valuations are currently as stretched as they will get all year as the Fed prepares to raise rates. They cite “smart money” selling by private equity sales through M&A and follow-on offerings which have reached record levels.