The major U.S. stock market averages ended the week essentially unchanged for the third week of November, as Thursday’s gains of around 1.5% nearly recouped Tuesday’s broad declines, and the other three days were essentially a wash. The Dow and Nasdaq each climbed 1.6% on Thursday and the S&P 500 was up 1.5%, as investor angst over Ireland’s debt predicament lessened on indications that Ireland would accept some sort of bailout from the EU. According to the Wall Street Journal, Irish officials acknowledged for the first time that they will need “some form of external assistance.” European stock market indexes fell back some on Friday, but Thursday’s gains were generally in the range of the U.S. market’s; for the week, the Stoxx Europe 600 index was off 0.25%, and after falling to a seven week low midweek, the euro ended with gains on Thursday and Friday. If you net out Tuesday’s drop against today’s advance, U.S. stock prices are virtually back to last Friday’s closing levels, roughly 2% below the recent peak and up nearly 77% from the March 2009 bottom (S&P 500).
• The index of 10 leading economic indicators, reported yesterday by the Conference Board, is worth noting for its 0.5% rise in October, its second straight rise of that magnitude, and for the upward revisions to earlier months’ data, a benign signal for the next six months or so, in our view. Plotted nearby, the LEI slowed over the summer months but popped higher since then. The big contributions to the LEI’s 50-basis-point rise in October were financial indicators: the positively sloped yield curve (+25 bps), the rise in stock prices (+16 bps), and growth in the real money supply (+15 bps).
• The quickening in the U.S. economy over the past couple of months – after a soft patch this summer – is occurring with a minimum of inflationary pressures, notwithstanding the Federal Reserve’s QE1 and QE2 attempts to boost prices. The core consumer price index (ex food and energy) is running at 0.8%, lowest in nearly 50 years. Cleveland Fed’s median CPI, another measure of underlying inflation pressures, increased just 0.5% over the past 12 months, essentially the lowest in the 26-year history of this data series.
INVESTMENT OUTLOOK…Over the past two months, market momentum has been impressive in financial assets as well as in real assets. But this week and last, asset prices have run into some resistance. The escalation of inflation expectations – no matter how limited inflation appears to be in the official inflation indexes – recurring credit anxiety in Europe, and the rise in the dollar suggest that we may have embarked on an interim period of “risk-off” investing ahead. While these trends may prove to be no more than a temporary pause in this latest Fed-fueled bull market, it is worth remembering that easy-money-driven bull markets often do not end well. Strong corporate earnings of the sort seen in Q3 can overcome a lot of the market’s shortcomings. But, judging by the recent poor market reaction to Cisco’s injection of some caution into its outlook, investors never tire of asking “What have you done for me lately?”
Michael Flament (203-783-4360) email@example.com