Economy Still Expanding As Sentiment Swings More Bullish
By Gus Krafve
November 8th, 2010
In the Market Insights article I wrote two months ago, the markets were on high alert for a double-dip recession. Investor pessimism was at yearly highs, and the S&P 500 was down nearly -5% on the year. Now, those fears of a double-dip recession have waned, and the S&P 500 is up 7.84% year-to-date as of October 31. Over the past two months, a slew of economic data has shown that the overall economy is still grinding out some growth. The most recent quarterly Gross Domestic Product (GDP), released October 29, showed the economy grew 2% in the third quarter. To put this in perspective, economic growth has averaged 3.3% since the end of WWII. So while the economy is growing, it is well below trend which is a key reason why the unemployment rate remains at elevated levels.
Quarterly earnings have again been strong with 76% of the companies in the S&P 500 having beaten their third quarter analyst expectations, posting earnings growth on average of 18.2%. Technology has shown the most earnings momentum, with third quarter median growth of 55%. The Telecommunications Services sector, which primarily consists of AT&T and Verizon, is the only sector thus far to have posted declining third quarter earnings, down -6.7%. The year-to-date performance numbers as of October 31 for the major market indices are as follows:
• S&P 500 +7.84%
• S&P MidCap +15.42%
• S&P SmallCap 600 +13.28%
• Dow Jones Ind. Avg. +6.62%
• NASDAQ Comp. +10.50%
• EAFE (Foreign Developed) +1.05%
• Long-term Treasuries +15.18%
• Barclay’s High Yield Bonds +14.41%
• Barclay’s Aggregate Bond +8.33%
• Gold +23.86%
• CRB Commodity Index +16.90%
• U.S. Dollar Index -1.0%
As I write this article, the election results are just in. The Republicans have gained control of the House, and the Democrats have retained power in the Senate. The market is reacting as if it was basically a non-event as these expectations had been largely priced in. At this point, the stock market appears to have priced in further positive expectations from the economy and the Fed. We have logged some impressive gains over the past two months on the back of positive news and are well overdue for a pullback in stocks. According to Ned Davis research as of October 31, the MSCI World Index has gone 46 days without as much as a 2% correction. The normal tendency has been for a 2% correction at least every 17 days since 1972.
