It was a light week for economic data, but the bulk of it was very encouraging. Yesterday, the Treasury announced that tax receipts are rising faster than government spending. It is a clear sign that the economy is gaining strength. The Treasury’s budget showed that tax receipts are up 9.4% while government outlays rose only 4.8%. Four months into the fiscal year, the deficit is at $418.8 billion, down from $430.7 billion a year ago. Any news that the economy is growing faster than the government is good news.

The flurry of economic data released this week was on balance surprisingly strong, with the notable and regrettable exceptions of jobs and housing. Fed Chair Ben Bernanke summed up the economic outlook yesterday. “Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established.” Yet almost every other metric is strong and getting stronger. Quarterly corporate profits are sharply ahead of a year ago, manufacturing is growing stronger, productivity continues to rise, and consumer spending as evidenced by retail sales is gaining strength.

Common sense as defined in the Encarta Dictionary is “sound practical judgment derived from experience rather than study.” In his 1776 treatise Common Sense, Thomas Paine used plain language to speak to the common man and woman in America challenging the authority of the royal monarchy over them. For the next few minutes, to the extent possible, try to suspend influences that pull you away from common sense thinking; such as politics, media, and persuasive speakers. 

Since stocks turned sharply up last September, they have been on a steady rise, with one notable 4% exception during the month of November. Economic news, both at home and abroad, has steadily improved, but not enough to explain the strength and duration of the rally. Likely much of the buying strength is coming as bondholders cash in profits and head for equities. About the same time stocks began rising, bonds began a steep descent on hyped up inflation worries with the 7-10 year Treasury index losing roughly 6%. More recently, domestic stocks have also benefitted from rising international, particularly emerging market inflation. As central bankers in the fast growing economies of China, Russia, and Brazil raise rates to control speculation, stocks in those countries look less favorable than in the US where rates are being held near zero by the Fed. 

The economy is coming back according to stocks, bonds, gold, economic reports, and Mr. Bernanke. The S&P 500 gained 13% in 2010 and 1.4% so far this year. Companies are poised to report strong earnings for the fourth quarter with profits for S&P 500 companies expected to be up about 20%. Unfortunately, unemployment is not yet following suit, despite the unexpected drop in the headline number.

In conversations with clients, friends, and relatives this past week there seemed to be an almost universal ‘good riddance to 2010.’ But there also seemed to be hope that the now one will bring improvement. We join the hope that faith, optimism, and resilience will prevail.

Inflation continues to be subdued at the consumer level, but one wonders for how long as prices continue to rise for producers of goods and services. Other economic indicators released during the week were mostly positive, some strongly so. The US equity markets are largely unchanged on the week while Treasures gave up .56%. However, there were two strong buying days for Treasuries indicating the two-month slide may be reaching a climax.

The biggest news this week was that of the deal reached between President Obama and Congressional Republicans on extending the Bush tax cuts. On the news, the S&P surged two thirds of a percent then settled back as investors considered both the potential for higher deficits, at least in the short run, and the difficulty of getting it through Congress as liberal Democrats railed against the measure throughout the day. Obama defended his deal saying he was able to preserve tax breaks for the middle-class and extend unemployment benefits that were set to expire. 

The US stock market as measured by the MSCI US Broad Market Index is up 2.4% for the week. The S&P is up the same and the Dow is up 2.3%. Various economic reports released this week proved considerably stronger than expected, boosting the outlook for stocks. Wednesday was a particularly good day, when it was reported that private employers added more jobs in November than previous months and the Fed’s Beige Book report of regional economies concluded that “the economy continued to improve, on balance” from early October to mid-November. Today’s jump in the unemployment rate so far, has not stemmed the advance. 

Equity markets took a 1% hit on Tuesday when Cisco, a bellwether of the tech industry, expressed concern over its projected revenues. Investors ignored analysts’ reminders of the recent reports of other large techs which were in sharp contrast to Cisco’s warnings. But investors are concerned over the broader question; will companies be able to grow sales numbers sufficiently in a sub-par economy to sustain record earnings momentum?