The S&P 500 had its weakest day since before Thanksgiving (losing 1.1%), as did Nasdaq (-1.5%), while the Dow Jones Industrials was little changed on the day.IBM, which is easily the highest priced stock in the Dow 30, gained 3.3% Wednesday thanks to last night’s favorable earnings report, and that was a big reason for the Dow’s relatively strong showing today. (The 90 basis-point difference today between the S&P 500 and the Dow was the largest in two years.) The shares of Apple, yesterday’s other late-day standout earnings report, opened higher today, but ended down 2%. The S&P 500’s price weakness came from all 10 sectors, although financials and materials were the biggest losers on the day, each dropping 2.2%. Goldman Sachs disappointed the market today when its revenues from trading and investment banking came up short of Street projections.
Another sour note of sorts for investors to deal with Wednesday was the 4% decline in housing starts in December to the lowest level in 14 months. The housing report wasn’t as bad as it appeared, however, as building permits – which are the leading indicator – increased 17% for the final month of 2010. That seemingly favorable result needs to be toned down somewhat as well, since the lion’s share of the increase in permits owed to a jump in multiunit permits, a notoriously volatile series. Single-family permits increased a more moderate 5% in December and are still running at levels 15% below last spring’s tax-credit-boosted totals. Nothing on the horizon points to more than an tepid, irregular recovery in housing any time soon – but then we are not expecting much out of the sector in our GDP model.
Treasury bond prices bounced higher Wednesday, taking their cue from the weakness in stock prices. The yield on the 10-year Treasury note fell to 3.34%, just about reversing Tuesday’s uptick in yields. As we noted yesterday, the 10-year T-note’s yield has largely been in a trading range of 3.30%-3.50% for more than a month.
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.