Permanent Value

Weekly Update: November 8-12, 2010

Michael La Salle
November 12th, 2010

Stocks Down on China Fears

Stocks closed down for the first time in five weeks as the S&P 500 lost 1.79% and the Dow Jones Industrial Average fell 2.12%.  Fears that China may be raising interest rates to slow down its economy pushed stocks down on Friday. 

In economic news, the U.S. trade gap shrank more than expected in September.  The overall U.S. trade deficit narrowed to $44 billion, expectations were set at a $45 billion deficit.  Jobless claims improved for the week of November 6th as initial claims fell 24,000 to the lower-than-expected 435,000 level.  Consumer sentiment improved as the mid-month of November reading came in at 69.3, up from October’s reading of 67.7.

In quarterly earnings news, Macy’s announced earnings of eight cents per share, 166.67% higher than the expected three cents per share.  Cisco Systems also topped expectations after posting earnings of 37 cents per share, 5.71% better than expectations.  Walt Disney Company disappointed this week as the entertainment giant posted earnings of 45 cents per share, one cent below expectations.

Rally Here to Stay?

Over the past six to nine months investors have been fearful of another economic dip and subsequently in the stock market.  Double-Dip Recession and Dead-Dog Bounce are a couple of terms that have been thrown around by the media to describe any possible market pullbacks.   More recently, some analysts are forming and disseminating the opinion that the upswing in the stock market will continue through the end year, and then taper off.  The S&P 500 has rebound over 75% from its March 9th, 2009 lows including a gain of more than 14% from September 1st of this year.   This upturn along with improved economic conditions has analysts moving towards the expectation that the current rally will last for the next several years.

One sign that the stock market will continue to rise is the determination of the Federal Reserve to stimulate the economy.  With the recent news that the Federal Reserve will be buying $600 billion of Treasury securities as part of a quantitative easing, it seems that the central bank has made a decision to drive economic growth in the economy.

 There are also positive economic indicators that the economy will continue to grow.  The job market is improving (nonfarm payrolls jumped 151,000 jobs in October.), auto sales are up nearly 30% this year, and according to the Association of American Railroads, intermodal rail traffic was up 14% year-over-year in October(a strong indicator of improvement in international trade).

With aggressive monetary policy and improving economic indicators, it is possible the stock market is at the beginning of a multi-year rally, giving investors a great opportunity to invest profitably.

Market Returns

  This Week Year to Date Last 12 Months Last 5 Years
S&P 500 -1.79% 7.54 % 10.30% -2.88%
Dow Jones Industrial Average -2.12% 7.33% 9.76% 4.74%

Next Week’s Economic Releases

November 15 – Retail Sales

November 16 – Producer Price Index, Industrial Production

November 17 – Consumer Price Index, Housing Starts

November 18 – Jobless Claims, Philadelphia Fed Survey