The stock market is in a sustained rally. The question is: Why?
There's nothing in the news that seems a strong enough catalyst to boost the indexes as much as they have. Sure, Apple had a blow out quarter, but it's just one stock. The market is made up of more than ten thousand.
The Fed recently announced it sees interest rates staying low for the next 3 years. That's pretty good except it means they don't expect much economic growth, certainly no inflationary pressure from high demand and diminished supply. Still, any forecast that has a certainty, as much certainty as is possible in these unusual times, must give comfort to some investors and consumers. Low rates mean ample funds for capital expenditures, or home purchases, or new cars.
But there's the latest housing reports. Lower sales again in December. Annual total was the slowest since the government started keeping records. U.S. sales of new homes fell 2.2% in December to a seasonally adjusted annual rate of 307,000. For all of 2011, sales of new homes fell 6.2% to 302, 000, the worst on record. Housing is one of the pistons in the engine that drives the economy. Home builders are in a tough trough now but with interest rates very low, and prices in the cellar in many communities, new home sales should pick up in 2012.....as long as employment stays the same or improves.
Jobless claims remain under 400,000, basically unchanged for a while. It seems as if the economy has stabilized, and anyone who might lose their job most likely won't at this point in the cycle. Auto manufacturers are scrambling for new workers as domestic makers continue to see metal move off lots. Foreign manufacturers are building their new plants in the U.S. since labor is in plentiful supply. Costs are much lower thanks to a weaker dollar. That means even more jobs.
Speaking of a weaker dollar, that helps exports, things like cars and airplanes to name only two. Both industries are flying high at the moment though Boeing's forecast wasn't as robust as some would have liked. But any company that ships overseas is seeing solid demand. A weak dollar makes all U.S. made products cheaper. More demand means more jobs.
The banks are still a big unknown. Lots of foreclosed property on the books. But this last quarter wasn't so bad. Many had solid earnings improvements. Bank of America continues to struggle with its purchase of Countrywide, but JP Morgan had a good quarter. So did Wells Fargo. Citi showed solid earnings. Any one of them in the capital markets in areas like Mergers & Acquisitions took a hit and are now laying off people in those divisions. Some good, some bad news in this sector.
At a recent Office of the Comptroller of the Currency (OCC) seminar, some of the regulators expressed a belief that the worst is most likely over for the banking industry if, and it's a big if, there isn't a double dip recession. Most economists don't see another dip ahead.
Overall, the light is getting a little bit brighter at the end of the tunnel, and we can see now it isn't a train. Europe is still a concern, but Italy is floating debt at lower and lower rates, meaning investors are more comfortable with its ability to pay back money it borrows. Everyone's waiting for the resolution in Greece, but that seems to be inching toward an agreement with current debt holders. Portugal is still on the watch list. Europe isn't fixed, but it isn't in the crisis mode of only a few weeks ago.
Maybe things aren't so bad after all. Maybe this rally will have some legs. There are plenty of problems left to solve. But some investors, the ones with more appetite for risk, are beginning to change their mind set. Most
investors are still reluctant to really get involved in the market. They're waiting to see more good news. Most likely, when it comes, the market will be much higher as it continues to climb the wall of worry.
- Ted Allrich
January 26, 2012