Is the market ready for a comeback?
Just a couple of weeks ago, on October 3rd, the S&P 500 was down 12.6% for the year and things weren’t looking too good for a comeback. Since that time, it has trimmed the loss to only 2.6% and needs to gain just 33 points to get above the 1,257 where it started the year. If the S&P 500 finishes this year with a gain, it will be its biggest comeback since 1984!
What has caused this turnaround? One reason is that investors are becoming more confident that Europe will protect its banks from huge losses on Greek bonds if that country fails to make good on its debt. Another reason is that many people still think stocks are undervalued and that company earnings are going to be better in the third quarter than many analysts expect.
Since July, analysts have continually cut their earnings estimates based on fears that the U.S. is heading into a recession. Much to their surprise though, positive reports on retail sales, applications for unemployment benefits, and the number of jobs added in August have been better than expected. So while some have been pricing the market in expectation of the worst, things haven’t been as bad as many expected.
Seasonal investor behavior could also be at play here. If you look at the 30-year time period from 1981-2010, you will find that the average price return for the S&P 500 Index has been 7.14%. While this is significant, it is even more impressive that the index ended positive 24 out of 30 years, or 80% of the time! "Positive market psychology hits a fever pitch as the holiday season approaches and does not begin to wane until the spring," according to the Stock Trader's Almanac.
While Europe’s debt problems still aren’t solved, and it is definitely too early to count on gains for the year, we are happy to see this positive momentum in the stock market and hope it continues.
ECONOMIC CALENDAR: Monday – Empire State Mfg Survey, Industrial Production
Tuesday – Producer Price Index, Treasury International Capital, Housing Market Index, Ben Bernanke Speaks at 1:15 PM ET
Wednesday –Consumer Price Index, Housing Starts, EIA Petroleum Status Report, Beige Book
Thursday – Jobless Claims, Existing Home Sales, Philadelphia Fed Survey, Leading Indicators
Data as of 10/14/2011 1-Week YTD 1-Year 5-Year 10-Year
Standard & Poor's 500 5.98 -2.63 4.33 -2.07 1.22
Dow 4.88 0.58 4.93 -0.53 2.46
NASDAQ 7.60 0.56 9.55 2.63 5.66
MSCI EAFE 6.41 -8.74 -7.08 -2.96 2.64
10-year Treasury Note (Yield Only) 2.07 N/A 2.49 4.81 4.66
Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized.
Sources: Yahoo! Finance, MSCI Barra. Past performance is no guarantee of future results.
Indices are unmanaged and cannot be invested into directly. N/A means not available.
HEADLINES:
Earnings season is in full swing as the week ahead includes reports from nearly half of the Dow's 30 components, including Intel, McDonald's, and General Electric, and 96 members of the S&P 500 including, Apple, Southwest Airlines, and Chipotle Mexican Grill. S&P 500 company earnings are expected to have climbed 23% in the third quarter of 2011, according to earnings tracker Thomson Reuters. Revenues of the companies in the benchmark index are expected to have risen 10%.
France and Germany have less than a week of frantic negotiation ahead to resolve key differences on a “comprehensive plan” to end the Eurozone sovereign debt crisis after the world’s leading finance ministers put the ball firmly in their court over the weekend. The Group of 20 richest nations told the Eurozone that by the European summit next Sunday it should: agree on the losses the private sector should take on Greek debt; arrange a credible plan for the recapitalization of Europe’s banks; and install a firewall to protect other countries from Greece’s woes.
Throngs of Apple fans lined up in the wee hours Friday outside the company's flagship store in Manhattan to be among the first to get their hands on the new iPhone 4S. Two hours before Apple's new smartphone was slated to go on sale, hundreds of aspiring buyers filled the plaza outside the Fifth Avenue glass cube, echoing scenes that had already played out earlier in the day in Australia, Japan, Germany, France, and other Apple stores around the world.
