Major U.S. stock market averages closed the second week of 2011 at two to three-year highs, with the S&P 500 total return index 99% higher than it was at the market low 22 months ago.Stock prices extended their four-month rally though the middle of January, adding another 1%-2% in the latest week, 0.5%-0.7% in Friday trading. The S&P 400 mid-cap index added 0.7% today, closing at an all-time high for the first time since July 2007. What few earnings reports there were generally came in to the positive side of Street forecasts. Retail sales grew 0.6% last month, slightly behind market expectations of 0.8%, but for whole of the fourth quarter sales had their best showing since 2001. The Fed reported that industrial production rose fully 0.8% in December, bumping up the capacity utilization rate to 76% – still low but up significantly from the midyear 2009 low of 68%.
Treasury bond prices bounced around Friday before ending almost one-quarter point lower at 10-year maturities and twice that at 30 years. Treasury yields climbed two or three basis points for the day, producing a slightly steeper yield curve. The consumer price report out this morning may have taken bond prices a bit lower; the core CPI was up 0.1% in December – in line with market expectations – but the headline CPI’s rise of 0.5% last month was higher than expected, nudging the year-over-year rate of increase to 1.5%, largely on higher gasoline prices. Crude oil futures were up to $92.65 a barrel on Friday, while gold lost close to 2%, closing the week at $1363 an ounce.
INVESTMENT OUTLOOK…The respectable year-end rally in stocks, fashioned out of improvement in leading economic indicators, has continued early in 2011. At some point, the U.S. economy will have to do without the trillion dollar stimulus packages – past and prospective – that have been contributing to the quickening seen lately in economic activity. In the end, strong corporate earnings can overcome a lot of this market’s shortcomings, and we judge the profits outlook for 2011 to be good. With respect to bonds, we are not completely comfortable with the near unanimity reflected in the markets that interest rates can only go higher in 2011; our forecast is for a modest elevation of yields as the year progresses. Stock market volatility has receded from the awful levels of 2008-09, but we would not be surprised if there are occasional bouts of volatility popping up through 2011, although so long as earnings prospects remain favorable the general trend of stock prices figures to be up.
Copyright © 2011 by Wright Investors’ Service, Inc.