One Big Monster Stock Market Rally

The U.S. stock market ended a rampant week with a whimper this past Friday, as early euphoria gave way to a sober look towards a crucial moment in the European debt crisis occurring this Friday. Much of the week’s gain was thanks to Wednesday’s 4.2% surge, which came after six of the world’s major central banks banded together to help alleviate some strains in the funding markets. On the week, the Dow Jones Industrial Average added some 788 points, or 7.01%, to reach the 12,019.42 mark. That’s the second-biggest weekly point gain in its history. The broader Standard & Poor’s 500 index tacked on 7.39%, to finish at 1,244.28. The Nasdaq Composite was higher by 7.59% and the smaller-cap stocks, as represented by the Russell 2000, was higher by an astonishing 10.34 percent, or 68.86 points. It was the Russell 2000’s biggest weekly point gain in its history.For the year-to-date statistics, the major equity indexes however are still mainly to the downside, with the exception for the Dow. The S&P 500 is down 1.06 percent; the Nasdaq Composite is down 0.98 percent; and the Russell 2000 is off by 6.21 percent. The Dow Jones Industrial Average however is higher by 3.82 percent.The question on investors’ minds is whether this latest rally has legs, or whether it will fade away like so many others in the past few months. A study by the Wall Street Journal suggests that any central-bank intervention might indeed be a turning point for the overall equity markets. Over the past 80 years, central banks have joined forces just seven times during financial crises, albeit in different ways and amid different circumstances from today’s. On average, U.S. stocks had a real return of 9.1% in the three months following a coordinate intervention, 10.6% after a year and 24.5% after two years, according to the Journal’s analysis. Let’s just hope that history might repeat itself in regards to our own equity markets.Treasury securities obviously did not benefit from last week’s huge stock market rise, as money flowed out of the safe harbor of U.S. government bonds. As equities had their best week since the autumn of 2008, the yield on the 10-year Treasury note hit its highest level since late October. In reaction, the 10-year Treasury yield slipped from its five-week high of 2.167% early last Friday to end the week at the 2.046% mark. However, any yield in the low 2% range for the benchmark Treasury bond is still hardly elevated when looking at historical data

Upcoming

This week’s economic calendar is relatively light. International trade figures and the ISM nonmanufacturing index are the main events for the week. However, investors will also be digesting factory orders (Monday) and the first reading of December consumer sentiment on Friday. Also on Friday we have the European heads of state trying to formulate some solution to their sovereign-debt crisis. Look for some sort of aggressive fiscal integration along with tight budget constraints, all led by the country of Germany. Many analysts also think that the European Central Bank could cut interest rates at its meeting on December 8, in addition to other steps to ease strains for the European financial system. There’s no doubt that December promises to be an interesting month, so until next week, take care!!

Sources: Barron’s, Wall Street Journal, Assoc. Press, Econoday, Bloomberg, Dow Jones & Co., Briefing.com, Gorilla Trading