Aided by some upbeat economic reports, U.S. stock prices rallied Wednesday by roughly the same magnitude as Tuesday’s losses. After three days of trading in this holiday-shortened week, the S&P 500 and Dow are off just 0.1%, a pretty good result considering where they were 24 hours earlier. Nasdaq and the small and mid-cap indexes had an even better Wednesday, gaining on the order of 2%, which puts them 1%-2% ahead for the week to date. More weakness in the euro took a back seat today to a flurry of positive economic data out of Washington.
• Personal income advanced 0.5% last month, and prior month totals were revised higher by up to 0.5%. Wage and salary compensation increased 0.6% in October and prior estimates were increased by as much as 1% back to April. As the chart illustrates, adjusted for inflation, wages and salaries have begun to revive – even faster than at a comparable stage of the 2002-03 recovery, although still below par.
• Initial jobless claims dropped to 407,000 in the latest week, lowest total of the year. One week ahead of the important payroll employment report, the trend in jobless claims is as benign as we’ve seen in the current cycle. Additionally, consumer sentiment improved for the month of November, according to the U of M index.
• Durable goods orders were disappointing, falling 2.7% ex transportation. This volatile series was revised higher for September but the October decline more than made up for it. Nondefense capital goods ex aircraft orders were similarly below expectations, and the series is worth watching to see if the October results will be revised higher the way September’s were.
• New home sales fell 8% last month, far worse than 2% drop the market was expecting. About the only positive to say about the October starts and sales data is that the inventory of unsold homes continues to decline. Otherwise a pretty dismal report and certainly no sign of light at the end of the tunnel. For the moment, housing will have to contribute to the economic recovery merely by getting no worse (or perhaps by getting worse at a slower rate).
INVESTMENT OUTLOOK…Over the two months September-October, market momentum was impressive in financial assets as well as in real assets. But this November has not been as kind, as 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, equity investors never tire of asking “What have you done for me lately?”
Michael Flament (203-783-4360) <a href=mailto:firstname.lastname@example.org>email@example.com</a>