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September 7, 2010
LAST WEEK
Market sentiment was revived by a return to mixed data, following a
dreary summer of seemingly endless negative news. Personal spending was
up this past week; personal income rose modestly; factory orders and
manufacturing activity increased; home prices rose for the third
straight month; pending home sales were positive and consumer confidence
revived. But the news was not all good: construction spending fell;
motor vehicle sales were flat; productivity slipped; the service sector
retreated and the all important payroll number - although it beat
expectations - was not high enough to reduce unemployment. Still, there
was enough good news to give the markets a healthy boost.
S&P 500: 1105 (up 3.76 for the
week and down 0.90% on the year)
NASDAQ:
2234 (up 3.76% for the week and down 1.54% on the year)
Dow: 10448 (up 2.93% for the week and
up 0.19% on the year)
US Treasury
10 yr: 2.71% (from 2.65% last week)
Crude Oil (October): $74.34 (from $75.17 last week)
Gold (December): $1,249 (from $1,238
last week)
USD/Euro: $1.2893
(from $1.2762 last week)
THIS WEEK
With
economic data extremely thin this week (consumer credit, jobless
claims, trade balance and inventories), it will be up to the traders to
set the tone for the markets. Traditionally, volume on the exchanges
increases after the Labor Day holiday, as “serious” senior traders
return from summer recess. We doubt that any serious trader, in this day
of electronic devices and market mayhem, truly goes away. But given
that the first three days of September essentially erased August’s
dismal slide, and that the markets are circling the flat line for the
year, we’ll call ourselves even and give the fall a fresh start.
COMMENTARY
Where to From Here?
September is supposed to be a cruel
month. It has the worst track record for stock performance. 58% of the
time September equity returns are negative, and when prices do fall,
they decline an average of 4.67%. However, there is also a lesser known
data point that states: if, on the first day of September, stocks climb
1% or more, the upward movement continues for five out of six years. So
when opportunity knocked this week in the form of benignly positive
economic news a decent September 1, the contrarians jumped on board.
What
does all this tell us about this coming September and the rest of the
fall? Not much. Data points are averages. Sentiment can pull the markets
one way or the other on any particular day, but results over the course
of any one year are associated more current conditions than statistical
averages. So let’s look at some of the more important factors in play
this fall.
Sentiment
Issue:
is negativism (concern over the double Ds – deflation and a double dip)
over rated? Or are active investors clinging to past market performance
based on optimistic outcomes that are not likely to repeat themselves?
The Federal Reserve
Issue: Does
the Federal Reserve still have bullets in its arsenal, and if the Fed
deploys quantitative easing (QE2), will it be effective?
Corporate Earnings
Issue: Can
corporations, flush with cash, cling to their profit margins and when
will they start to hirer new workers?
Politics and Taxation
Issue: What will the tax policy
be for 2011 and when will we learn what the policy is?
Economic
Growth
Issue: Is the global growth story still positive,
meaning is there enough final demand for products and services to spur
economic growth?
Our View
The
markets need a dose of optimism to tread water or move higher. Optimism
could be spurred by the Fed through QE2 or by the passage of
legislation limiting tax increases in 2011. We could also have stronger
economic data, such as we saw this week, on a more consistent basis.
Currently stocks are priced for a sluggish economy. A combination of all
three of these indicators could provide a meaningful market rally
before the end of the year. One or two factors in play could sustain
existing levels or move the markets higher.
On the other hand,
negative surprises, consistently poor employment numbers or economic
activity, the failure of QE2 to stem the tide of falling prices, and/or a
significant tax increase for 2011 could derail any recovery and –
correspondingly – the stock market.
In addition, the role of
expectations and sentiment will be key. Headwinds (labor markets,
housing and the drawn out process of deleveraging) are strong, holding
risk takers at bay. Crowded sidelines - be it businesses, consumers or
investors - could leave the markets languishing and the economy stalled
even if the potential for a meaningful economic recovery exists.
This
fall will be one of the most dynamic seasons we can remember. Crystal
balls have been replaced with smoked glass. We see the shadows. We know
the players, but clarity is clouded and vigilance is required.
Tune
in to News Talk 630 WPRO and 99.7 FM daily for our "Making Money
Updates". Get the latest market news and our take on the day's events
with our market commentary at 8:10am and 5:32pm. For more information,
visit www.StrategicPoint.com.
*Past performance is not indicative
of future results. Indices are unmanaged and you cannot directly invest
in them. The Nasdaq Composite Index measures all NASDAQ U.S. and
non-U.S. based common stocks listed on the Nasdaq Stock Market. The
S&P 500 index is based on the average performance of 500 industrial
stocks monitored by Standard and Poor’s. The data referred to above was
taken from sources believed to be reliable. StrategicPoint Investment
Advisors has not verified such data and no representation or warranty,
expressed or implied, is made by StrategicPoint Investment Advisors.
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