Stocks have risen in 12 of the past 15 weeks, including last week’s gains, as the S&P 500 reached the highest level in more than two years. Also, Treasury bond yields have risen nearly a full percentage point to a six–month high, from 2.39% on October 7 to 3.32% on Friday. And, the prices of some commodities, such as copper, set new all-time highs. Optimism on the economy and profits has been strong. During this week, however, the markets’ momentum will be tested.
High expectations for U.S. economic data leave room for disappointment. About 85% of next week’s economic data in the United States, which includes data on manufacturing, housing, retail sales, leading indicators and inflation, is expected to accelerate versus the prior month, setting the bar fairly high for market expectations.
In the first week of December, investors were willing to dismiss the much weaker-than-expected November employment report as an outlier and the November ISM index that was weaker than the prior month as just a brief pause. But if this week’s data is also mixed and confirms the uneven pattern of growth in the economy, it may shake investor confidence.
Investor confidence is high. Last week, as stocks reached new postrecession highs, investors were the most bullish in nearly four years. According to the American Association of Individual Investors survey, the
percentage of bulls exceeded the percentage of bears by over 30% for the first time since February 2007.
Beyond the economic data, the markets’ momentum may be tested by policy concerns as it relates to the tax cut extensions, European solvency issues, and the actions of the Federal Reserve (Fed).
- Investors may “sell the news” of the passage of the tax cut extension having already bought the rumor of passage earlier this month. Votes in the Senate and House are likely to take place this week. A compromise that results in a much larger impact on the deficit (and more potent economic stimulus) that could further bolster investor confidence is unlikely at this stage.
- The return of solvency questions surrounding a number of European nations may weigh on markets. The fiscal crash diet in Greece, Ireland and other troubled European nations is highly unpopular. Local protests are taking place daily. On Wednesday, December 15, there is a European Union-wide labor strike planned. In addition, Greece votes on its 2011 budget this week, which is likely to refocus attention on how little Greek government has done to shore up its fiscal imbalances.
- The Fed has faced political pressure on all sides since the last meeting on November 3 to do more, to do less, and to do nothing at all. Legislation was even introduced to change the Fed’s mandate. Debate surrounding the effectiveness of the Fed’s actions (given the recent rise in yields and the dollar) and how limited future actions to aid economic growth may be may dominate the headlines around the next Fed meeting on Tuesday, December 14. Investors may be disappointed by a status quo response from the Fed.
While the events of this week may result in a pullback, any weakness in the markets should be viewed as a buying opportunity for those who are not fully invested. While volatility can be expected, we believe 2011 will deliver modest, single-digit gains for stocks and bonds accompanied by trend-like economic growth.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
High-Yield/Junk Bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price.
Stock investing may involve risk including loss of principal.
Energy Sector: Companies whose businesses are dominated by either of the following activities: The construction or provision of oil rigs, drilling equipment and other energy-related service and equipment, including seismic data collection. The exploration, production, marketing, refining and/or transportation of oil and gas products, coal and consumable fuels.
Consumer Discretionary Sector: Companies that tend to be the most sensitive to economic cycles. Its manufacturing segment includes automotive, household durable goods, textiles and apparel, and leisure equipment. The service segment includes hotels, restaurants and other leisure facilities, media production and services, consumer retailing and services and education services.
Consumer Staples Sector: Companies whose businesses are less sensitive to economic cycles. It includes manufacturers and distributors of food, beverages and tobacco, and producers of non-durable household goods and personal products. It also includes food and drug retailing companies.
Health Care Sector: Companies are in two main industry groups—Health Care equipment and supplies or companies that provide health care-related services, including distributors of health care products, providers of basic health care services, and owners and operators of health care facilities and organizations. Companies primarily involved in the research, development, production, and marketing of pharmaceuticals and biotechnology products.
Financials Sector: Companies involved in activities such as banking, consumer finance, investment banking and brokerage, asset management, insurance and investment, and real estate, including REITs.
Industrials Sector: Companies whose businesses manufacture and distribute capital goods, including aerospace and defense, construction, engineering, and building products, electrical equipment, and industrial machinery. Provide commercial services and supplies, including printing, employment, environmental and office services. Provide transportation services, including airlines, couriers, marine, road and rail, and transportation infrastructure.
Manufacturing Sector: Companies engaged in chemical, mechanical, or physical transformation of materials, substances, or components into consumer or industrial goods.
Materials Sector: Companies that are engaged in a wide range of commodity-related manufacturing. Included in this sector are companies that manufacture chemicals, construction materials, glass, paper, forest products and related packaging products, metals, minerals and mining companies, including producers of steel.
Technology Software & Services Sector: Companies include those that primarily develop software in various fields such as the Internet, applications, systems and/or database management and companies that provide information technology consulting and services; technology hardware & Equipment, including manufacturers and distributors of communications equipment, computers and peripherals, electronic equipment and related instruments, and semiconductor equipment and products.
Telecommunications Services Sector: Companies that provide communications services primarily through a fixed line, cellular, wireless, high bandwidth, and/or fiber-optic cable network.
Utilities Sector: Companies considered electric, gas or water utilities, or companies that operate as independent producers and/or distributors of power.