The Nvest Market Blog, our current thoughts on the Street

Washington Induced Worries - Week Ended 1/22/10

posted 01.25.2010 at 09:07 a.m. by steve

Markets generally do not like uncertainty; but last week, Washington introduced much uncertainty into the headlines, resulting in heavy selling pressure for stocks. In fact, stocks bled roughly -5% in 3 trading days (Wednesday to Friday) putting stocks in the red for 2010; it was the worst 3-day performance since last March. During the week ended January 22, a dangerous cocktail of headline news made its way into the spotlight. Most notable was the continued tough language from Obama toward the banking industry, which in recent weeks has included the announcement of new fees/taxes to be imposed on the largest banks. This week it is the proposal from Obama to hand down more strict regulation relating to the trading and risk-taking activities permitted by the largest financial institutions. If that were not enough, there was also threats from politicians indicating that they will not vote to re-nominate Fed Chairman Bernanke to a second term. There was also further development with China and its recent moves to tighten fiscal policy. Chinese officials are feeling necessary a pre-emptive measure to fight future inflationary pressures and have begun draining some of the liquidity in its financial system. As such, the focus of the markets has clearly turned toward the bill starting to come due. Tighter monetary and fiscal policy, coupled with increasing talk over taxes and regulations designed to reign in risk taking are not favorable developments for stocks. As such, generally favorable corporate earnings and other economic data (mixed) the met expectations was overshadowed by the uncertainty being created by our Government and others.

With financials leading the declines, the S&P dropped -3.90% while the NASDAQ and Dow fared similar fates. And, despite the fact that stocks reached new cycle highs on the first trading day of the week (Tuesday), the markets have now erased the gains seen since the start of the new year. This week, investors will continue to watch for more signal that the bill is starting to come due. Additionally, it would be welcome to see economic data resume a significantly improving trend. This week will be a busy one, with lots of news on housing, and other key reports to watch including consumer confidence, jobs, durable goods orders and the initial reading on 4Q GDP (Friday). Also critical will be the FOMC meeting statement on Wednesday; investors will be watching closely to see if the phrase of keeping interest rates low for an extended period remains in place; if language begins to take even a slightly more hawkish tone, the markets could again face some near-term struggle. We do remain bullish for 2010, but believe that near-term a pause is likely, especially until Washington can manage to stop being the big headline and investors can again focus on economics and fundamentals. In the end, we feel it highly likely that Bernanke will be confirmed for a second term, and any new financial regulations and taxes will be less harmful to the banking industry than investors initial fears suggest. As evidenced by Healthcare, rarely is final government policy ever as extreme as the talk that began the discussions.

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Earnings Season Starts Mixed - Week Ended 1/15/10

posted 01.19.2010 at 10:11 a.m. by steve

US stocks finished the week slightly lower than where they started with the large-cap Dow slipping just -0.08% while the S&P and NASDAQ declined -0.78% and -1.26%, respectively. The modest selloff Friday was the most noteworthy day during the week as the Dow shed over 100 points. However, despite that and the slight loss of value for the week, bulls do seem to retain the upper hand. Even as economic and/or corporate earnings news has appeared weaker than expected, selling action has been contained and stocks have typically closed well above their daily lows. In recent weeks and months, pullbacks by the market have been relatively shallow and short-lived as the market manages to continue its climb on the wall of worry and creep higher.

In the latest week, which was the start of 4Q 09 earnings season, it could be argued that news has been more mixed. Alcoa, an aluminum producer and bellwether of manufacturing activity, missed expected earnings. Others, like JPMorgan Chase managed to post better than expected earnings, but disappointed analysts on much weaker than expected revenues from its consumer segment which suggests that Main Street continues to suffer during this recovery. Additionally, investors were forced to contemplate what paying the bill (for past and current stimulus/deficit spending) might look like as President Obama announced a proposal to tax banks. The reason the announcement was significant is because we know that current deficits will have to be paid for through a combination of higher taxes and higher interest rates; what we do not know is how quickly the Government will begin trying to collect those revenues. It has been our suspicion that higher taxes and interest rates are not a 2010 story, but rather 2011 or later as politicians seek reelection in the current year and do not want to alienate voters, but the worry is increasingly real. This week the major focus will be corporate earnings, housing starts and another round of jobless claims.

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Starting the New Year and Decade in Positive Territory - Week Ended 1/8/10

posted 01.11.2010 at 09:54 a.m. by steve

The first week of the new year (and new decade) was a very positive one for stocks, led by the strong positive performance on the first day of the week when the S&P and other major indexes jumped over +1.5%. That up-move was predicated on much better than expected data from the manufacturing sector indicating strong activity including a surge in new orders. As one can imagine following such an outsized move for the markets, the subsequent days were less robust, but still accretive to performance. Perhaps what is more telling however, is that despite the weaker economic headlines that ensued during the later-half of the week (including housing), stocks managed to close at or new session highs each day, suggesting that while many people are far from bullish; they are having difficulty being too pessimistic either. All told, the indexes managed to add to their early gains with the S&P 500 finishing up +2.68% while the Dow and NASDAQ closed up +1.82% and +2.12%, respectively. It appears that the S&P has broken through its directionless volatility ceiling, creating a new floor of support at current levels.

While economic headlines were decidedly mixed last week (neither good enough to raise expectations for the economic recovery, or bad enough to warrant a more pessimistic view), diving into the details has offered a much more favorable perspective. For example, while the drop in employment for December was -85,000 (a setback following other recent data), leading indicators of the employment situation including the average hours worked and temp employment were both encouraging. Additionally, increasing new orders and manufacturing activity (mentioned above) should soon lead to employment gains as demand outstrips capacity. As we have noted in the past, employment is the epitome of lagging indicators and will improve only when the economy has been in a recovery for many months (6-12 on average). The media will be able to talk about high unemployment well into a recovery. And, some economists are predicting that 4Q real GDP could be very strong when reported later this month (as high as 5%). If the economy can muster those kind of numbers, do not be surprised if a positive feedback loop, in which consumers spend a little bit more freely (thereby raising demand, increasing corporate profits) creates the need for new jobs. This week, the markets will be watching international trade data (tomorrow); retail sales, jobless claims and inventory levels (Thursday); and inflation, consumer sentiment and industrial data (due out on Friday).

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A Good Year, But Horrible Decade for Stocks - Week Ended 12/31/09

posted 01.04.2010 at 09:28 a.m. by steve

Thursday, December 31 was the final trading day of 2009 and the decade. It capped what was a great year for stocks despite the treacherous first quarter. After being down as much as -25.1% year-to-date at March 9, the S&P 500 began its recovery and finished with an outstanding +26.4% gain for 2009. Still, even with the tremendous rebound off of the March lows (now over 60%), the decade will go down as one of the worst in recorded stock market history. Since the ball dropped in Times Square marking the start of the year 2000 (when everyone was worried about Y2K computer issues), the S&P has lost an average of -3.3% per year adjusted for inflation. One would think that the next decade has nowhere to go but up; after all, reversion to the mean is a powerful concept. However, that concept is not to suggest that we will see outsized gains in the decade ahead, but perhaps something more normal in the range of 8%-10% gains per year for stocks on average could be expected. Without a doubt, there are major hurdles for the US economy to conquer, and the early years are not likely to be robust given the slower-than-normal economic pace anticipated.

In the most recent week, the Santa Claus rally managed to hold onto its gains in the midst of a news vacuum (no major economic data was released last week). The few pieces of new economic data were favorable, including another strong improvement in new jobless claims and the Chicago PMI. Consumer confidence has also risen in recent weeks. Accordingly, 7 of the last 9 trading days have finished higher. Trading volume was unsurprisingly weak during the final week of the year, as is usual between Christmas and New Years. The S&P finished slightly lower for the week at -1.01% while the NASDAQ and Dow closed down -0.72% and -0.87%, respectively.

2009 was a good one for investors; we anticipate 2010 will also be rewarding for stocks as markets continue to advance and climb a wall of worry. Happy New Year and welcome 2010!

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