Despite Worries – A Good Quarter

If the averages close today without significant change, the NASDAQ will have risen 4% and the Dow Jones Industrials 3.75%. Our models are on track to do well too with our most conservative up 3% and our All Growth model up 8.3%, before fees. They say the stock market climbs a wall of worry and there have been plenty of worries, but so far equity investors believe the economy will power on and that the Fed will do what it can to assure it will. 

Earnings of S&P 500 Index members may rise an average of 3.2% from a year earlier, which ends a 20-quarter streak of gains exceeding 10% according to Bloomberg. The biggest problems are among financial and consumer discretionary companies. They all cite the housing slump as the major contributing factor. The slump, the biggest in at least 16 years shows no signs of abating. New-home sales dropped 8.3% in August to the lowest in seven years, the Commerce Department reported yesterday. Sales of previously owned homes fell 4.3%, the National Association of Realtors said on Tuesday. 

Housing woes have helped drop consumer confidence to the lowest level in almost two years in September according to the Conference Board on Tuesday. But as confidence numbers fall, the consumer is behaving quite differently. The Commerce Department reported today that spending in theUSrose more than forecast in August. The .6% rise in consumer spending was the biggest in four months and followed a .4% increase in July. Businesses also showed strength as the National Association of Purchasing Management,Chicagoindex of business activity unexpectedly rose to 54.2 in September, from 53.8 the previous month. 

Inflation appears to be under control too. The government reported today that core consumer prices last month had their smallest annual gain since February 2004.

Investors abroad are betting that the Federal Reserve has more room to cut rates if needed to jump start the economy as they drove the dollar to a record low against the euro. Some traders say the level is extreme and will correct in the coming weeks. Futures contracts show an 86% chance that the Fed will cut rates by another quarter percent to 4.5% at its October 31st meeting.

Economic reports were on balance quite good this week as contrasted with weeks past. The seesaw will likely continue until the national psyche make up its mind to retreat in fear of recession or to plow ahead with the global expansion. We will keep watching.