BEING STREET SMART November 12/04
by Sy Harding
November 12/04
A WINDOW OF OPPORTUNITY?
Isn’t it strange how year after year surrounding conditions are
increasingly gloomy as the stock market’s favorable season (November
to May) approaches. And then how those gloomy conditions usually seem
to improve once a stock market rally begins. Here’s a philosophical
question for you. Do the conditions actually improve, or is it the attitude
and perception of them that improves, as new money flows into the market
in the fall and launches a stock market rally, making investors look more
at the positives, less at the negatives?
The Dow made a new low for the year at 9,749 on October 25, down 7% for
the year. It has gained 7.5% in the three weeks since. The S&P 500,
which was down 2% for the year on October 25, has also rallied 7.5% since.
Was the market seeing through the worries that were present in October,
to a period when the worries would be less foreboding? Or did the chunks
of extra money that investors and the market begin to receive in the fall
(from mutual fund distributions, etc.), which create the market’s
favorable season, simply overwhelm the worries?
The latter certainly has to receive a good measure of the credit, since
the market’s seasonal pattern over the last fifty years, of making
most of its gains in its favorable seasons, has been so persistent. However,
it’s also true that a number of the market’s previous concerns
have been alleviated.
The Presidential election ended without the deadlock and legal contortions
that were feared in October. The employment picture that had been so bleak
all summer took a turn for the better with the report a week ago that
twice as many new jobs were created in October as economists had forecast.
Retail sales, which had begun to soften, and auto sales that had plunged
during the summer, rebounded nicely according to the most recent reports.
That relieved some of the worry that rising interest rates and rising
gasoline prices would force consumers to put a clamp on their wallets.
This week the University of Michigan’s closely watched Consumer
Sentiment Index, which had been plunging month after month, reversed to
the upside. It improved to 95.5, the Index’s highest reading in
three months, from October’s level of 91.7.
The U.S. dollar continued to decline, in fact to a new multi-year low.
But the upside of that is that it makes exports less costly for foreign
consumers and imports more expensive for U.S. consumers. At some point
that should begin to reverse the record U.S. trade deficit with the rest
of the world. And it was reported on Tuesday that the U.S. trade deficit
declined from $53.5 billion in September to $51.6 billion in October.
Not a big deal. $51.7 billion would have been a record deficit just a
couple of months ago. But at least it’s a step in the right direction.
Crude oil prices, which have been surging all year and reached a record
high just a couple of weeks ago, have pulled back from that high over
the last two weeks, from $56 a barrel to $47. That also is not a big deal.
The market began worrying about what the high price of oil might do to
the economy and corporate earnings a number of months back, when the price
of oil moved above $35. So hovering around $47, oil is still a potential
big problem going forward. But the perception of risk has changed with
the decline from $56.
Last but not least, fear of a second terrorist attack on U.S. soil, which
had seemingly been overdue for three years, has lessened considerably
since the safe passage of the anniversaries and events of the summer and
fall that were thought to carry the greatest risk.
However, a spike-up rally of 7.5% in three weeks, which is an annualized
rate of 130%, is probably too much too soon. I suspect the market is going
to have to drift sideways for awhile, or perhaps pull back some on short-term
profit-taking, before it makes much further upside.
Sy Harding is president of Asset Management Research Corp., publisher
of The Street Smart Report Online at
www.streetsmartreport.com and author of 1999’s Riding The Bear
– How To Prosper In the Coming Bear Market.