The Conference Board’s index of leading economic indicators increased 1.1% in November, the biggest increase since March, as nine of the 10 individual series increased – the most in seven years. The only indicator that failed to rise last month was, not surprisingly, building permits, which have fallen to within 2% of the March 2009 more-than-50-year low. In your father’s economic cycle, housing was a reliable early cycle industry. Not so this cycle, and this of course helps to explain why the current economic recovery has been relatively lackluster. As the chart below shows, however, the other nine leading indicators have in the aggregate fashioned a respectable positive signal, certainly better than was seen in either of the past two cycles, if not so robust as in the 1975 and 1983 recoveries. The economic outlook for the next six months is promising, the leading indicators suggest, and the new tax package signed into law by President Obama today ought to extend and expand the economic recovery as 2011 progresses. Better news on the employment front would help, and the improvement in weekly hours worked and the decline in jobless claims since August suggest that such news may be gradually coming this way.
• Except for the Dow Jones Industrials, which was little changed today, the other major U.S. stock market averages ended Friday at two-year highs. For the week, the market averages had gains ranging from 0.2% for the Nasdaq Composite to 0.8% for the S&P 600 SmallCaps. Since the market’s March 2009 lows, the SmallCaps are now up 128%, while the big blue chips in the S&P 500 have posted an 84% advance. With two weeks remaining in 2010, the S&P 500 is within spitting distance of achieving a 10% total return for the fourth quarter alone.
• Bonds ended this week with a second day of healthy gains. The 10-year Treasury note climbed three-quarters of a point on Friday, confounding the doomsayers who extrapolated the higher yields of earlier this week into a straight up forecast for interest rates. The two-day Thursday-Friday decline in the 10-year Treasury yield of nearly 20 basis points (its yield ticked up just two bps for the week) suggests that the market may be seeing value at current yield levels and that the rise in interest rates may be more gradual and more orderly than the rise of the past several weeks. Today’s rally in Treasurys was attributed by some to still festering concerns about the European financial crisis. Gold and crude oil futures prices retreated for the week and the dollar was relatively stable against the euro and the yen.
INVESTMENT OUTLOOK…The resistance that U.S. stocks ran into in November has given way to renewed market momentum in December. Despite an escalation in inflation expectations and recurring credit anxiety in Europe, a respectable year-end rally has been fashioned out of improvement in leading economic indicators and perhaps a sense that the two parties in Washington may be able to come together and get something positive done in 2011. It is important to remember that at some point the U.S. economy will have to do without the trillion dollar stimulus packages – past and prospective – that are contributing to the quickening seen recently in economic activity. In the end, strong corporate earnings can overcome a lot of this market’s shortcomings, and the profits outlook for 2011 is improving with the better economic prospects.
Michael Flament (203-783-4360) <a href=mailto:firstname.lastname@example.org>email@example.com</a>