Investors’ Moods Improving

The S&P 500 is up 1% so far this week and almost 8% in November.  Perhaps the single most important factor has been the 21% decline in oil prices over the past month.  Both shrinking demand and increasing supplies have contributed to the remarkable drop in prices.  But, still high at $43.00 a barrel, energy costs continue to blunt optimism on the strength of the recovery, causing particular concern in the area of consumer spending.  But recent historical evidence has been very positive. 

The government reported early in the week that the economy grew faster than expected in the third quarter, largely due to consumer spending.  It surged 5.1% during the months of July through September, the fastest rate in almost three years.  Credit card sales were up 6.1% for the two days following Thanksgiving and U.S. Internet sales were up a convincing 40% the day after.

The mostly good news following Thanksgiving was spoiled somewhat by WalMart as they reported disappointing November sales and lowered their forecast for the remainder of the year.  Higher end retailers reported much better results and forecasts indicating that high energy and health care costs are weighing most heavily on the budgets of lower income Americans and affecting their spending decisions.

The jobless rate fell to 5.4% from 5.5% last month.  The economy added 112,000 workers in November, fewer than the 200,000 expected.  Manufacturing jobs fell for the third month as that sector lost another 5,000 jobs.

Bonds, particularly Treasuries, have declined in price over the past month as fears on several fronts have caused selling.  The declining dollar has been blamed for some treasury selling as traders assert that the Administration actually wants a cheaper dollar as it will stem the rise in the surplus.  Others have worried that the foreign appetite for American debt will decline resulting in dumping of Treasuries.  The impression that the Fed will continue to raise rates along with inflation worries have also pressured bonds, particularly short-term instruments.  Yield on the two-year treasury was up 18% during November while the 30-year was up only 4% during the same period.  Today, however, bonds are rallying as the jobs report has investors re-thinking their inflation concerns.  Yields on two-year bonds are down dramatically to 3% and the 30-year yield is under 5%.

Technology has been the performance story this week as semiconductors, computer storage and home entertainment software turned in convincing returns.  Intel helped the tech case today as its shares rose as much as 9% on a surprise pickup in chip demand prompted the company to raise its fourth quarter revenue forecast.  The Goldman Sacs Semiconductor Index is up 12.5% in the last month.  The month’s leaders internationally include Austria, Brazil, Sweden,S outh Korea, and Germany.

The near term outlook for stocks remains promising.  The market has afforded opportunities in industries such as semiconductors, computers, software, healthcare, and education.  In our opinion and the opinions of those experts we follow, shares of companies in these industries do not adequately represent their potential if the economy continues to improve.  We believe it will.  Larger, longer term issues such as Social Security, Medicare, Tax reform, Trade deficit, Budget deficit, and others will be decided in the coming months and years and they will have significant impact on investor decisions.