On Tuesday, we noted how the Nasdaq Composite had risen to its highest level relative to the Dow Jones Industrial Average in 10 years; our words proved to be the kiss of death for the tech stock rally – at least in the short term. It has been somewhat of a strange week for stocks, with the Dow advancing 0.7% to a 31-month high, while the Nasdaq Composite ended the week off 2.4%, despite some rather stunning P&L reports from Apple, Google and to a lesser degree Intel. Friday saw General Electric report better-than-expected Q4 earnings and a whopping 1% increase in sales, and GE shares rose 7%, a big factor in the Dow’s new high. The five-day performance gap between the Dow and Nasdaq indexes of nearly 3% (in favor of the Dow) is the biggest for any such span since the week leading up to the November elections. Coming as it did, with technology company earnings in high gear, suggests at least a momentary wariness about market pricing. After a 27% increase in the S&P 500 since the market’s 2010 low on July 2 (and an increase of nearly one-third in Nasdaq), perhaps some hesitation is appropriate at this point. It is certainly true that not all the problems of the global financial system have been solved.
U.S. Treasury bond prices rebounded nearly as much on Friday as they lost Thursday. Still, for the week, 5-year Treasury note yields were up just short of 10 basis points, as were yields on the 10-year Treasury. At 3.41%, the 10-year T-note yield is in the upper part of the 3.30%-3.50% trading range seen over the past month. We continue to think that Treasury bond prices may experience something of a rally in the short term – perhaps coincident with some pullback in equities, if that’s what this week’s retreat in tech shares and in mid- and small-cap issues is indicating.
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. 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.