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S&P 500, DJIA at new all-time highs on positive economic data

Thanksgiving dinners take eighteen hours to prepare. They are consumed in twelve minutes. Half-times take twelve minutes. This is not a coincidence. – Erma Bombeck

In what is sounding like a broken record, both the S&P 500 Index and the Dow Jones Industrial Average set new all-time highs again last week on positive economic data, strong earnings by retailers and further central bank stimulus measures. Since the lows reached back on October 15th when the S&P 500 had fallen almost 10%, this major index has recovered all that it had lost and then some as it has jumped 13% in slightly more than a month. Fueling the gains were a surplus of favorable economic data that included fewer jobless claims, strong existing home sales, a better-than-expected reading of the index of leading economic indicators and strong manufacturing data. Third quarter corporate earnings also continued to sparkle as retailers such as Target, Lowe’s, Best Buy and Williams Sonoma all beat analyst estimates and offered favorable guidance for the current quarter. Minutes from the most recent Federal Reserve policy meeting also struck a conciliatory tone even though it appears that the Fed is on track to raise interest rates despite low inflation and weak global economic growth. Fed officials decided to leave the “considerable time” language in place for raising rates after some thought removing it would signal a change in policy, thereby resulting in a tightening bias. Although China and Europe both reported weaker than expected data for economic growth, their central banks placated investors by announcing new stimulus measures. In a surprise announcement, China’s central bank cut its one-year lending and deposit rates while the European Central Bank (ECB) announced plans to expand its quantitative easing program. Earlier in the week, Japan reported that it had slipped into a recession and would postpone a scheduled sales tax increase for eighteen months. A majority of the world’s central banks now have easy monetary policies in place and only time will tell if they are successful in boosting economic growth.

Last Week

Homebuilder confidence rose in November due primarily to the existence of low interest rates, affordable home prices and an improving job market. Although U.S. housing starts fell last month, housing permits jumped to over a six year high and starts for single-family homes rose to the highest level in a year, providing evidence that the housing recovery is solidly on track. Jobless claims fell more than expected and it was the tenth straight week that claims were below 300,000. Both the producer price index (PPI) and the consumer price index (CPI) increased modestly in October and prices have only risen 1.7% during the last year. A measure of factory activity in the mid-Atlantic region, the Philly Fed Index, rose to the highest level since 1993 and was more than double expectations.

In merger and acquisition news, Canadian pharmaceutical giant Actavis will acquire Allergan and Baker Hughes agreed to be acquired by Halliburton.

For the week, the Dow Jones Industrial Average gained 1% to close at 17,810 while the S&P 500 Index rose 1.2% to close at 2,063. Both levels are new all-time highs. The Nasdaq Composite Index added 0.5% to close at 4,712.

This Week

Third quarter GDP growth will likely be revised slightly lower from 3.5% to 3.2% but still show an economy that is growing at a moderate pace. Consumer confidence for November should rise from last month’s reading on cheaper gasoline prices, improving jobs data and continued gains in the stock market. Ex-transportation, durables goods orders for October should show a modest increase.

The Organization for Petroleum Exporting Countries (OPEC) will meet this week to address falling oil prices and decide whether or not to cut production in order to raise prices.

As the earnings season winds down, among the largest and most familiar companies scheduled to report include Hewlett Packard, Analog Devices, Campbell Soup, Tiffany & Co. and Deere & Co.

Portfolio Strategy

With central banks in Japan, Europe and China now scrambling to adopt easy monetary policies and find ways to stimulate economic growth, the Federal Reserve, in effect, is headed in the opposite direction. Although the near-zero Federal Funds rate is widely forecast to rise by June of next year, the third and final round of the Fed’s bond-buying program known as quantitative easing ended in October. If anything, the Fed is looking for ways to normalize its monetary policy by hiking interest rates as early as possible without jeopardizing the fragile economic recovery. Unfortunately, global economic growth concerns and persistent low inflation have handcuffed the Federal Reserve and could result in postponement of these plans. Inflation in the U.S. has been running at 1.7%, less than the Fed’s 2% target. While the Fed’s employment data has been steadily moving in the right direction, the inflation numbers have not cooperated. A strong dollar, falling oil prices and weak commodity prices have all contributed to a lack of inflation, not to mention the effect of economic weakness overseas. As long as the world’s other major economies are struggling to grow and implementing stimulus measures designed to keep interest rates low, placing a timetable on the Fed’s first rate hike becomes problematic.