Stocks are up with Halloween fast approaching. Investors should certainly be content that the month of October has been nothing short of a financial ‘treat’ thus far. The broad equity indexes were higher for the seventh week out of the past eight, with earnings reports helping drive prices higher. Bulls continue to feel that the economy is beginning to improve and that it is just a matter of time before the worst of the worst of the financial crisis is wrung out of the system. The bullish pundits are also looking forward to more quantitative easing once the Federal Reserve meets on November 3. For another, stocks – even while almost 75% are above the March 2009 low – haven’t gotten close to being expensive by most historic fundamental standards. On the other hand, the bearish crowd argues that there is still much uncertainty on the employment and housing fronts, and that the volume over the past two months has been extremely light to say the least. In addition, the bears feel that all the good news has already been priced into the markets, so there is really no major catalyst to drive equity prices higher.
With one trading week left in October, there’s been more treat than trick as the major market averages have +3% returns on the month so far. Thus, here is where we stand heading into the final trading week of the month:
- Dow: +0.63% this week & +6.76% this year
- S&P 500: +0.59% this week & +6.10% this year
- Nasdaq: +0.43% this week & +9.27% this year
- Russell 2000: +0.04% this week & +12.48% this year
In looking at the above market statistics, it begs the question; ‘What is causing the markets to move higher?” In reviewing such, it appears that the equity markets have anticipated several things. First, the entry of the bullish season from October into April/May, which has been well documented by the Stock Trader’s Almanac. Secondly, the market understood that the Fed comments from the August Federal Reserve meeting will mean that the Fed will implement another round of quantitative easing, now referred to as QE2. Third, in September, investors came to realize that stocks were undervalued as dividend yields on stocks were exceeding yields on fixed income. Thus major financial institutions began implementing some asset allocation back into stocks and away from fixed income. Fourth, the market is looking forward to the change in political balance in Washington with a shift in power in the House and potentially the Senate back to Republicans. And finally, on the economic front, we are into the next earnings season and as we’ve already mentioned, earnings continue to be very good.
With respect to interest rates, Treasuries zigzagged for much of last week with the 10-year yielding 2.561% on Friday, virtually unchanged from the prior week. The 30-year bond ended at 3.935%, down from 3.988% the previous week. The Fed has still got the pedal to the metal with respect to more quantitative easing, although once such easing does occur, look for bond yields to move higher.
Remember the banking crisis of last year when the government was forced to seize insolvent financial institutions? Well, U.S. state regulators are at it again this year as just this past week they seized six more banks in the southeast and Midwest, raising the total number of bank failures to 138 this year, which is nearly as many as in 2009. This year, 27 banks have failed in Florida and 16 in Georgia. The two southeast states have seen among the highest number of bank failures in 2010. The number of bank failures this year is almost certain to be larger than in 2009, when 140 banks were closed.
The markets will more than likely be digesting the news out of the G20 finance minister meetings which concluded over the weekend during the early part of the week, although they’ll be considerable economic news to digest as well. Monday will feature existing home sales for September and Tuesday brings October consumer confidence. On Wednesday it’s September durable goods and September new home sales. Friday is chock full of third quarter GDP, the October Chicago PMI and the University of Michigan sentiment tally. As is usual during this time of the quarter, we’ll be hit with a plethora of earnings reports with some of the more interesting names including the following; Exxon Mobil, Visa, Merck, U.S. Steel, Texas Instruments, Amgen, Ford motor, Kimberly-Clark, DuPont, Bristol-Myers Squibb,Southern Company, 3M, Procter & Gamble,Norfolk Southern, Microsoft, Chevron, Dow Chemical, Johnson Controls, Express Scripts and Barrick Gold.
Sources: Barron’s, The Wall Street Journal, CNN, The New York Times, The Financial Times, Bespoke Investment Group, Seeking Alpha