Another week, another all-time closing high for the S&P 500. With the market close on Friday, September 5^th, the S&P 500 has risen for five consecutive weeks – the longest win streak of 2014. For the year, the S&P has risen 9.9%, including 3.8% in August alone, which was the best monthly gain since February and the best-performing August in 14 years (since 2000). All three Dow Jones stock indexes (industrials, transports, and utilities) are moving higher together, which is a bullish sign.

Fears of wage-cost inflation and geopolitical turmoil in Ukraine and Gaza that caused a small stock-market correction in late July/early August — when stocks quickly dropped 4.3% over a two-week period — have evaporated, with stocks quickly reversing course back up in bungee-jump fashion, hitting new all-time highs. Ceasefires in both Ukraine and Gaza have reduced concern, as well as recent economic data indicating a “Goldilocks” environment that is not too hot and not too cold, which should simultaneously promote corporate earnings growth and prevent the Federal Reserve from raising short-term interest rates.

All of this economic strength has caused the Economic Cycle Research Institute’s (ECRI) Future Inflation Gauge to hit a 71-month high reading, which is somewhat worrisome. One person who doesn’t appear worried is Fed Chairman Janet Yellen, who stated in her August 22^nd Jackson Hole speech:

“Underutilization of labor resources still remains significant. Given this assessment, it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after our current asset purchase program ends, especially if projected inflation continues to run below the 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.”

This labor “slack,” however, could be a mirage and caused by “pent-up wage deflation” where employers kept wages abnormally high during the recession to maintain employee morale, so that the wage level during the economic recovery is now normal and doesn’t need to be raised. If this is the case, the current lack of wage increases should not be construed as evidence of labor slack, but simply a lull in wage increases that could explode higher if the economic recovery continues.

The stock market rally continued last week precisely because the August jobs report was weaker than expected, with only 142,000 new jobs – less than the 225,000 expected. In addition, the job numbers for June and July were revised down by 28,000. In this case, bad news for the economy is good news for the stock market because it signifies less chance that wage inflation will ignite anytime soon and force the Fed’s hand to raise short-term rates.

Also helping to keep U.S. interest rates low is the much-weaker economic news elsewhere in the world. On September 4^th, the European Central Bank (ECB) became so worried about a resumption of recession and deflation that it surprised analysts by cutting interest rates (51 out of 57 economists surveyed had predicted no rate cut) after ECB President Mario Draghi had stated previously that no further rate cuts were possible after June’s rate cut. In addition, the ECB initiated a quantitative easing program that will purchase asset-backed securities (ABS) and “covered” bonds (general obligation debt with ABS collateral) from European banks in an amount that could total $650 million over three years.

The ECB stopped short of authorizing the purchase of government bonds, but most analysts now expect such an expansion of the European QE program to be inevitable. Capital inflows into U.S. debt markets to escape the low and declining rates available in the European Union will put downward pressure on U.S. rates despite the improving economic news in the U.S. In addition, declining U.S. productivity is causing economists to downgrade the long-term growth potential of the U.S. economy.

The combination of strengthening U.S. economic growth and continued low interest rates caused by economic weakness elsewhere in the world is a powerful combination for continued U.S. stock-market gains. In fact, Morgan Stanley recently predicted that the S&P 500 could rise an additional 50% to 3,000 over the next five years (by 2020)! Over the intermediate term, positive momentum should continue to propel the S&P 500 higher. Between August 8^th and September 3^rd, the S&P 500 closed above its 5-day moving average for 18 consecutive trading days, which is very rare and historically bullish.

I would stay invested because the Ivy Portfolio market-timing system based on the 10-month moving average Moving Averages: Month-End Update for stocks, bonds, and real estate (the only sell is commodities).