Some positive underpinnings that may be helping the stock market’s uptrend thus far this year:
- The U.S. Labor Department announced this week that food and energy costs pushed down U.S. wholesale prices (the producer-price index, which measures what manufacturers and wholesalers pay for finished goods) in December, providing some relief for businesses hit by higher costs of other goods. In addition, there was a 0.4% rise in industrial production in December reflecting strength in manufacturing.
- Another positive is an article in today’s Wall Street Journal that spending on home maintenance by homeowners and landlords is forecasted to have increased in 2011 and will go up again in 2012. That would market the first year since 2006 that this has occurred.
- Right or wrong, the Federal Reserve appears to be ready to put additional steps in place to increase monetary easing in the upcoming months depending on several economic scenarios. As controversial as these steps have been, the stock market has reacted positively each time.
- Locally, I attended a bank advisory board meeting last evening. In attendance were several business owners of firms of various sizes. It was nice to hear one professional with a manufacturing firm state that his company is starting to see a pick up in orders. His customers are replenishing their inventory or are more confident about sales in the coming months.
In this same meeting, a local attorney, well-versed in mergers and acquisitions, stated that he has seen an increase in activity. And the bankers themselves had some positive comments regarding loan demand.
All in all, it was insightful to hear professionals from various industries acknowledge some positive signs in the economy. Trust me, no one was breaking out the champagne, but I got the feeling that the consensus view was tilting toward the glass is half full, as it relates to the U.S. economy.
The other side of the coin
In addition to these positive items, the stock market, and in particular financial (i.e., bank) stocks are performing better. Many analysts have the opinion that for the U.S. economy and stock market to recover long-term, it is necessary for the banking sector to perform better, getter healthier and back to the business of lending money. Improving corporate profits are a necessity as well. That being said, there is some concern about the market’s recent strength and the underlying companies’ earnings.
S&P 500 companies have already issued more profit warnings ahead of this reporting season than at any time since the fourth quarter of 2008. Yes, it is early in the reporting season, and investors remain optimistic and prefer to focus on positive economic signals instead of Europe’s debt crisis.
Stocks have burst out of the gates in 2012, surprising investors and pundits alike with the S&P 500 having its strongest start of the year in a quarter century. But the strong pace hasn’t persuaded the skeptics that the rally has legs. The bears point to a number of issues lurking ahead, ranging from corporate earnings to technical signposts that are used to predict the stock market’s direction.
Among investors’ chief concerns: Companies are reporting disappointing profits for the first time in years. Also, some analysts said some indicators are flashing gloomy signals. And a barometer of shipping demand, the Baltic Dry Index, has plunged in recent days, sparking worries that overall economic activity may be stalling.
Bottom line, there seems to be a more positive mood regarding the economy and stock market, even though we are seeing some mixed signals.
Reversal of fortune overseas
International stocks took it on the chin last year, but are bouncing back smartly. However, emerging countries are benefiting from of the problems facing Europe. Developing countries like Indonesia and Brazil are seeing their borrowing costs drop to record lows. This is a reevaluation of sovereign debt risk where emerging countries are considered more creditworthy and able to issue bonds at record low interest rates and in many cases below what comparable bonds would be for developed countries like Spain and France. As such, companies in these countries should benefit from the lower interest rates, and that can boost their stock prices as well.
The International Monetary Fund and European Central Bank are doing what they can to make sure that European banks have ample liquidity to make loans and carry on their business as usual. Even though a recession is expected in Europe this year, many economists believe it will not carryover to other countries. Thus, as previously noted, European stocks have performed well thus far in 2012, and the Stoxx Europe 600 index is trading at 10.2 times next year’s earnings, which is well below the 13 times long-run average.
The economic storms in Europe are probably not completely over, but there are some rays of sunshine through the clouds and investors are reacting positively to them.
Quotes
“Intelligence plus character – that is the goal of true education.”
Martin Luther King, clergyman and civil rights leader
“Life is not a problem to be solved, but a reality to be experienced.”
Soren Kirkegaard, philosopher and theologian
“The noblest treasure is the joy of understanding.”
Leonardi da Vinci, artist, inventor, etc.
Tony Moeller, President
Integrity Investment Advisors
12721 Metcalf, #202
Overland Park, KS 66213
tmoeller@iia-kc.com
913-897-2074
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