We were discussing this morning that this is the two-year anniversary of the start of the bull market that has seen the S&P essentially double from March 2009 lows. We were not able to celebrate with a very “inspiring” birthday party in the form of the U.S. equities open this morning. Markets are digesting yesterday’s gains while continuing to focus on geopolitical risk in the Middle East and North Africa along with the latest eurozone debt “flare up.” Portugal paid a high price to sell two-year bonds, exacerbating recent worries in peripheral Europe. Some corporate headlines may garner attention in the absence of market-moving data, including a major health care provider’s IPO preparation and a well-known technology company’s mid-quarter update. Also in the corporate arena, there is some telecom merger speculation. European stocks had an upward bias helped by some merger news, while the Hong Kong and Japanese stock markets closed with modest gains. On the commodities front, geopolitically-sensitive crude and precious metals are higher, as are key grains ahead of tomorrow’s monthly agriculture inventories report.
Looking back at Tuesday, modest losses on concerns about peripheral European debt markets reversed soon after the U.S. market opened. A rally in Financials occurred after “shareholder friendly” comments came from a major bank’s CEO. Meanwhile, speculation that more OPEC supply was on the way kept a lid on oil prices, which helped stocks end the sessions with solid gains – though at the expense of the Energy sector. Industrials got a lift from falling energy prices, while merger speculation drove strong gains for Telecom.
Around our financial planning firm this morning, we were discussing three items that we thought would be of particular interest to our readers:
How could this affect you? If you own Financial stocks, you could see Q3 and Q4 dividend increases. As we discussed above, a large industry player helped Financials significantly yesterday after that sector has displayed lackluster performance over the past couple of months. The bank CEO’s comments communicated a desire to return more capital to shareholders in the second half of the year in the form of dividends and share buybacks. Not surprisingly, the information was well received. However, challenges remain within the sector in the form of high regulatory costs and the mortgage put-back issue.
As gas goes up will the economy slow down? A rise in oil and gasoline prices typically work with a lag. Gasoline prices have risen by more than 40 cents per gallon since the start of 2011, with most of the increase coming in the last few weeks of February in response to the turmoil in Libya. Year-to-date, gasoline prices have averaged $3.18 per gallon, up about 30 cents from the Q4 2010 average of $2.90, and about 45 cents higher than the 2010 average price of $2.75 per gallon. Oil prices have followed the same pattern. Past energy price spikes tend to occur several quarters ahead of a slowdown in economic activity, so if sustained, the price increases seen in Q1 2011 will slow growth in late 2011 or early 2012. While the economy is in better shape now than it was during the 2007-2008 energy price spike, and the economy is far less sensitive today to energy prices than it was in the mid-1970s and early 1980s, the rise in energy prices is certainly on our radar and one that we will continue to monitor for our clients closely.
Weekly mortgage applications surge post-President’s Day holiday. Weekly mortgage applications surged 16% week-over-week in the week ending March 4, as both purchase (+13% week-over-week) and refinance (+17% week-over-week) applications increased. A portion of the outsized gain in the latest week was likely attributable to snapback from the President’s Day holiday in the previous week that held down applications. Since the trough in mortgage rates in early October 2010, mortgage applications are down 43%, with refinance applications down 60%. Despite the 75 basis point increase in mortgage rates since early October, however, applications for home purchase are up 6%, a sign that some stability may be returning to the housing market. The relative stability in purchase applications in the last few weeks is a hopeful sign as we head into the key spring selling season.
As always, email me here with your questions or comments. I love to hear from you and thoroughly enjoy the “intellectual debate” with our clients and friends that these opinions generate.
Greg Powell, CIMA
Note: The opinions voiced in this material are for general information and are not intended to be specific advice. Any indices such as the S & P 500 can’t be invested into directly. Past performance is no assurance of a future result.
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