The Dow Jones Industrial Average moved slightly lower last week – down 0.47%. The S&P 500 eked out a small gain, +0.07%, for the week. For the year-to-date period, the Dow is ahead 3.6% while the S&P is higher by 4.7%. Oil was up by 1.4% while gold jumped ahead by 3.95% on continuing global fears and the Fed announcement. The markets are off to a good start in 2012, but perhaps it is time for the markets to take a rest.
Last week saw mixed economic data with better-than-expected consumer sentiment and durable goods only to offset less-than-expected fourth-quarter GDP and pending home sales. Earnings have been reasonable so far with 59.9% of S&P 500 companies beating estimates, 29% missing estimates and roughly 11% in-line.
The Federal Reserve announced their intention to keep interest rates low until the end of 2014, but their language was vague enough (of course) to allow an increase in rates if warranted. The old adage – “don’t fight the Fed” appears to be working. The Fed is forcing investors to take on more risk, and we see equity prices moving higher as the year progresses. In the short-term, however, we would not be surprised (or disappointed) if the markets gave back a bit of their advance.
Europe continues to be a wildcard. We’re fairly confident that the next crisis (yes, there will be one) will originate in Europe. The absence of a viable Greek debt restructuring will rattle investors as spreads on Italian, Spanish and Portuguese debt widens.
“Understanding is the first step to acceptance, and only with acceptance can there be recovery.”
- Joanne Kathleen Rowling
This week will have some important economic data releases, as well as a slew of earnings reports.
Housing numbers [will the bottoming process continue?] and the Fed’s meeting [they’re expected to keep fed funds rate next to zero] will be out on the 25th.
Unemployment [don’t forget to monitor the drop-out rate], durable goods orders, and leading indicators will be out on the 26th. We will also get the preliminary look at 4Q2011 GDP.
Earnings reports will also power markets this week. Early reporters have produced mixed results, with technology strong, while many banks reported less-than-expected results. Apple, the Big Kahuna, will be reporting Tuesday evening.
The conventional wisdom prevalent at the start of the year was for a difficult first half followed by a more rewarding second half of 2012. This was an extrapolation of the Eurozone panic which impacted the second half of 2011. However, since then fears have subsided [at least for now] and the markets have advanced.
The market has actually gotten off to a great start this year, with the DJIA’s 4.1% increase the smallest of the major indices [the Nasdaq is up 7%]. There may be a tad “too much” optimism in today’s market, but this is a presidential election year, which tends to [unrealistically?] boost the country’s outlook.
Economic reports out today reveal trends favorable to U.S. and most foreign stock markets. Here at home the Empire State Manufacturing Index for January improved more than expected, rising to 13.5 from 8.2 (anything above 0 means the economy is expanding). Amusing to me the Chinese economy “only” grew at 8.9% for the quarter. As a result China may consider more easing of monetary policy.
An interesting report from Mark Hulbert (http://www.marketwatch.com/Journalists/Mark_Hulbert) was in the news discussing the first five days of January indicator. A commonly held theory is the market will be up for the year if it is up the first five days. Hulbert’s data debunked such an idea. He also brought up the “Santa Claus” theory about the last five days of the previous year and found the same lack of correlation. And he finished off by looking at the two together and found no predictive value.
He finished his piece by pointing out the real predictors-sales and earnings going up that year.
And Hulbert’s final words of wisdom-“Hope is not a Strategy”
On Friday the December jobs report showed the economy added 200,000 jobs and the unemployment rate dropped to 8.5% from 8.71%, continuing evidence that the economic recovery has accelerated from the 3rd quarter. Most economists are projecting 3% GDP growth for the 4th quarter of 2011.
This week starts the beginning of the 4th quarter earnings reports, starting with Alcoa on Monday and JP Morgan on Friday. These earnings reports may not be as robust as we experienced earlier in the year, as companies are running out of the ability to cut expenses. Also, in 2012 the projected recession in most of Europe will be a drag on earnings, including large U.S. multinational corporations. The European debt crisis has not yet been resolved and the Euro dollar (€) has further to fall (vs. the U.S. $).
“Be the change you want to see in the world.”
- Mahatma Gandhi
2011 is in the history books and we can all breathe a collective sigh of relief. Most of the memorable events were negative; the Japanese earthquake, the Eurozone debt crisis or the downgrade of the U.S. debt. Despite the continuous onslaught of day to day noise, the S&P 500 closed flat for the year (for the first time since 1970)!
2012 picks up where 2011 left off:
1. Sluggish yet improving U.S. economy
-Housing sales are improving as inventories decline, house prices soften and rents rise
-Consumer continues to spend, mostly at the expense of savings
2. Continuation of the Eurozone debt crisis
3. Increasing tensions in the Middle East
The U.S. is entering an election year which usually bodes well for stock prices and the economy. Although we are waiting to pull out the victory dance, we are cautiously optimistic.
The economic calendar picks up this week with updates on U.S. manufacturing, motor vehicle sales and culminating with the employment situation.
“An optimist stays up until midnight to see the new year in. A pessimist stays up to make sure the old year leaves.”
- Bill Vaughn