Financial Market Update
StrategicPoint of View®
March 22, 2010
Welcome to the StrategicPoint of View -- a market and economic overview of what occurred last week, what's up for this week, and our commentary on the economy and current market activity in general for “Making Money” listeners.
LAST WEEK
Inflation was tame, with the core Consumer Price Index rising 0.1%, or 1.3% on a year over year basis, the lowest pace in six years. Leading economic indicators pointed to moderate growth this summer, while first time jobless claims dipped for the third straight week, although there is no indication that businesses are ready to rehire. The Federal Reserve calmed investors by keeping the language of holding interest rates low “for an extended period of time.”
S&P 500: 1160 (up 0.87% for the week and up 4.04% on the year)
Dow: 10,742 (up 1.10% for the week and up 3.10% on the year)
NASDAQ: 2374 (up 0.25% for the week and up 4.63% on the year)
10-year: 3.69% (from 3.71% last week)
Crude Oil (April): $80.58 (from $81.24 last week)
Gold (April): $1,107 (from $1,107 last week)
USD/Euro: $1.3541 (from $1.3768 last week)
THIS WEEK
Housing, capital spending and the consumer are the focus of this week’s economic data. Upcoming economic reports include: existing-home sales, durable-goods orders, New-home sales, jobless claims, GDP revision and consumer sentiment.
COMMENTARY
The slow, sweet rally ended on Friday. We had eight steady days of very modest gains. The result, after taking into account Friday’s loss, however, was a less than impressive 2% rise in the stock indices, hardly enough to celebrate wildly. We have seen market moves of 2% take place in one day, never mind eight trading days. So why was this rally so sweet? What mattered this time was not the numbers, but the pace.
In February, 14 out of 19 trading days experienced moves of more than one hundred points. So far this month, 2 out of 15 trading days have experienced the same point spread.
Volatility has been the name of the game for many months. Programmed traders and option specialists feast on volatility: discrepancy is arbitrage and arbitrage is where they like to make money. But trading volatility isn’t always easy: it can be expensive and is increasingly tied to risk management models. There is some speculation that hedge funds, et al are taking a bit of a “wait and see attitude,” which we must say is refreshing after the roller coaster ride we have been subjected to. This has caused the VIX (CBOE Market Volatility Index) to fall to its levels of two years ago before the heart of the crisis sent this fear indicator sky rocketing. This leaves the appearance that the long term investor - who prefers stock prices to move in lockstep with economic data - is in control.
Ours is a modest recovery – therefore, ideally, stocks should be rising gradually. Two steps forward and one step back would be fine, as long as the ultimate direction were positive. We could even handle a spate of eight bad days in a row – the reverse of the recent rally - if at the end of the multi-day decline, the markets retreated only a couple of percentage points. That small a loss is not too great a challenge to overcome, assuming continuation of a moderate recovery.
A modest pace begets confidence. Imagine how much more conviction investors would have if they believed the markets had parameters. “Limit up or down 50 points on the Dow,” the Big Board would flash. All those folks sitting in cash on the sidelines would be itching to get back into equities. Bad economic news, like a poor housing or employment report, would be taken in stride – with recognition that these are the areas that are going to lag in the recovery. Mild inflation, low interest rates, higher industrial production, increased productivity, strong earnings – this data would provide a floor for the markets and offer justification for advancement. And consumers, seeing their portfolios gradually build over time, would become more willing to spend – thereby fueling the recovery through increased demand.
But, of course, the markets don’t work this way. Volatility, more than likely, is here to stay. High frequency traders with fancy algorithmic black boxes, day traders, hedge fund managers, large institutional traders, options traders, etc., they will likely get tired of the quiet markets and rev up the volume – both in terms of numbers and sound. This could cause some investors to remain on the sidelines, as they fear the book-end declines of the last decade will repeat themselves, and consumers to hold back a bit on their spending.
Pace is a critical factor when it comes to investor confidence. We’d like to see a continuation of subdued fluctuation in prices, but we won’t become complacent.
Tune in to News Talk 630 WPRO and 99.7 FM daily for our "Making Money Updates". Get the latest market news and our take on the day's events with our market commentary at 8:10am and 5:32pm. For more information, visit www.StrategicPoint.com.
*Past performance is not indicative of future results. Indices are unmanaged and you cannot directly invest in them. The Nasdaq Composite Index measures all NASDAQ U.S. and non-U.S. based common stocks listed on the Nasdaq Stock Market. The S&P 500 index is based on the average performance of 500 industrial stocks monitored by Standard and Poor’s. The data referred to above was taken from sources believed to be reliable. StrategicPoint Investment Advisors has not verified such data and no representation or warranty, expressed or implied, is made by StrategicPoint Investment Advisors.
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