SPDR S&P 500 ETF (NYSEArca: SPY) was set for its fourth straight week of gains and traded near an all-time high Friday after a measure of consumer sentiment came in better than expected.
The preliminary reading of the Thomson Reuters/University of Michigan consumer sentiment index climbed to 83.7 from 76.4 in April, beating economists’ expectations.
The index rose to its highest level since 2007.
“Consumer sentiment rebounded in early May to the highest level in nearly six years as Americans felt better about their financial and economic prospects, particularly among upper-income households,” Reuters reports.
The S&P 500 ETF was up 16.6% year to date heading into Friday’s trading.
“Certainly economic data support the market rising, and there is still a huge element related to quantitative easing for sure,” said Randy Frederick, managing director of active trading and derivatives at Charles Schwab, in a MarketWatch report. “We may have been in a bull market even if there was no quantitative easing and interest rates were normalized, but we would have had a far worse recession than we had.”
Next page: Consumer sentiment boosting stocks
2013 continues to be a very strong year for stocks, particularly in the U.S., said David Kelly, chief global strategist at JP Morgan Funds.
“For the first few years of the stock market rally, rising stock prices could be ascribed to a surge in earnings or falling interest rates. However, neither of these forces has been particularly strong in 2013,” Kelly said in a note. “With over 90% of the S&P500 market cap reporting, operating earnings are up about 7% year-over-year, while long-term Treasury rates, while still very low in absolute terms have actually risen since the end of 2012.”
The strategist thinks higher confidence is boosting multiples and pushing stocks higher.
“There has always been a strong relationship between P/E multiples and consumer confidence as investors who feel confident are more willing to pay up for future earnings,” Kelly wrote. “Indeed, regression analysis on monthly data over the past 20 years suggests that a 10 index point rise in the index of consumer sentiment is associated with a roughly 2 point increase in forward P/E multiples.”
He said the forces that drive confidence have begun to improve significantly.
“In particular, almost 80% of the variation in quarterly consumer sentiment readings since the late 1990s can be explained by four variables: unemployment, home prices, stock prices and gasoline prices,” Kelly wrote. “Recently, all of these have gotten better with the unemployment rate falling to 7.5% in May from 7.8% in December, new home prices up 8% year-over-year in the first quarter, the S&P 500 up … from the start of the year and gasoline prices drifting down in recent weeks, in contrast to their normal seasonal pattern.”
SPDR S&P 500 ETF
Full disclosure: Tom Lydon’s clients own SPY.