Friday, October 16, 2009
New Highs on New News
With the Dow Jones Industrial Average closing Friday at a 2009 high, it is hard not to embrace the old adage that the ''trend is your friend'' for equity investors. The 4% move for the week gives the DJIA a 15.36% total return year-to-date on the heels of positive earnings surprises and encouraging economic news.
The market reacted positively to a string of encouraging news developments, such as the Institute for Supply Management report on an expanding non-manufacturing services sector - the first such positive report in eleven months. In addition, the Conference Board also reported that the Employment Trends Index moved higher in September, the first such improvement since January. Further, the Labor Department reported that new claims for jobless benefits declined to its lowest level of the year.
Improvements were also seen in surprisingly good sales reports by retailers. Retailers have been suffering for more than a year as consumers have continued to be stingy with their spending. However starting in September, year over year comparisons should become notably easier. Despite the better than same-store sales news, September retail sales may still be compromised by the end of the ''clunker'' program, which caused vehicle sales to plunge. Therefore, the upcoming retail sales announcement will be closely scrutinized.
Looking more broadly, the dollar suffered this week, particularly following the rumor of high level meetings between Russia, China, Japan, France and the Gulf States with the goal of pricing oil in a currency other than the dollar. While the rumors were denied, they moved the currency markets none-the-less. The declining dollar is widely viewed by some market observers as a vote on U.S. monetary and fiscal policy actions. However, the falling dollar can also have a positive impact on U.S. exports as they become less expensive to foreign buyers.
As evidence that a weak U.S. dollar is starting to boost the U.S. economy, on Friday, the Commerce Department announced that the U.S. trade deficit unexpectedly declined 3.6% in August due to a surge in exports, which represents the strongest rise in ten years. This report surprised many economists, who expected a rise in the trade deficit due to higher crude oil prices.
Gold also hit a new nominal high this week (in real, inflation adjusted, terms it would still need to nearly double to hit a new high). Some market observers believe that the cause of such price moves may be due to future inflationary fears. Such fears are not unfounded as the Federal Reserve finds itself walking a fine policy line of providing continuing economic stimulus through its quantitative easing while avoiding the spark of an inflationary spiral. Interestingly, the Reserve Bank of Australia is backing off their stimulative policies as evidenced by the increase of 25 basis points in their overnight cash rate. Yet another potential price driver of gold that should not be discounted is international nervousness over Iranian nuclear policy. The response by Iran to any Israeli or U.S. countermeasures would have serious consequences to the global oil market and thus the global economic recovery.
The coming week has several economic announcements that hold the potential to be market movers. According to the Wall Street Journal, month-over-month retail sales figures for September are due to be released Wednesday at 8:30 am (EST) with the consensus analysts estimates looking for a decline of -2.1% (amid a range of -2.6% and -1.3%). Thursday will have the release of the Consumer Price Index also at 8:30 am (EST) with the consensus estimates coming in at a near flat 0.1% increase from a range of 0.0% and 0.3%. On Friday at 9:15 am (EST), industrial production figures are due to be released with the consensus month-over-month change of 0.2% expected, which is within an analyst range of -0.1% and 0.5%.
While it may be unreasonable to continue to expect 4% weekly market moves, clearly the move off of the March 9th lows is a powerful one and it would be dangerous to second guess the momentum of the market in terms of potentially incurring opportunity cost. Assuming the market is not already discounting earnings predictions amid improving economic conditions, the stage may be set for strong earnings announcements which may result in surprisingly positive price moves.
