Today’s report from the Federal Reserve Bank of Philadelphia goes a long way toward explaining why W.C. Fields and Cliff Lee prefer the City of Brotherly Love. The so-called Philly Fed report on the business outlook survey for the Philadelphia Federal Reserve District showed solid gains for the month of December, particularly in new orders – both current and future. That better-than-expected result, along with a benign report on weekly jobless claims, formed the basis of today’s rally in the stock market, which carried the S&P 500 to a 27-month high of 1243. Other major market averages also hit two-year highs or were within basis points of highs. It didn’t hurt that the bond market a bit rebounded from recent selling pressures or that the Obama/Republican tax package moved closer to reality with the Senate’s passage of the legislation.
• Due to what the Wall Street Journal called the lure of yields at seven-month highs, Treasury bonds had their best day in a while on Thursday, as the 10-year T-note climbed almost one point and its yield dropped 11 basis points. The 10-year’s yield fell to 3.42%, while the 10-year TIPS yield fell for a second day to 1.08%, down 13 bps from its Tuesday high. The twos/tens Treasury yield curve flattened by eight bps to 2.78% from yesterday’s multi-month high; the euro regained some of the ground it lost against the dollar earlier in the week; and crude oil and gold futures prices each retreated by roughly one percentage point.
INVESTMENT OUTLOOK…Over the two months September-October, market momentum was impressive in financial assets as well as in real assets. But in November, the rally in stock prices ran 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 – and December’s trends are certainly much more pleasant – 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. And the profits outlook for 2011 is gets better with the stimulus that appears likely to come out of Washington in the New Year. But, as we saw with the poor market action in Cisco’s shares following management’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>