What Keeps Pushing the Market Higher?

market4/21/11: In the markets, as in life, there are no guarantees but everyone is entitled to their opinion. Here’s my opinion on the financial markets today.

The Nitty Gritty Details:

U.S. stocks opened higher this morning, setting the S&P 500 up for its first weekly gain out of the past three.  Earnings are again driving the buying, led by very strong results from a number of well-known companies.  The economic data will also get some attention today, as weekly jobless claims fell slightly less than expected, which caused futures to pare some of the early gains.  Earnings optimism also lifted European and Asian markets, while commodities continued their ascent.  Gold and silver hit new highs again, with gold over $1500 and silver near $46.  Oil gave up early gains and remains near $111 while natural gas and copper are higher this morning.

Looking back at Wednesday, U.S. stocks staged a strong rally as a number of companies across several sectors reported better-than-expected results.  Most of the good news was concentrated in the Technology sector.  Solid existing home sales and some encouraging European debt offerings also contributed to the positive sentiment.  Commodities were broadly higher on a weak dollar and growth optimism, while oil got an additional lift to over $111 from a bullish weekly inventory report.  Technology (+2.4%) topped the sector rankings on the good earnings news, while higher crude and natural gas prices lifted the Energy sector to a more than 2% gain as well.  No sector fell, but disappointing earnings from a major financial services company weighed on the Financials sector, which could only muster a 0.3% gain.

Around our financial planning firm this morning, we were discussing four issues that we thought would be of particular interest to our readers:

The Market Breakdown:

  1. Not that we’re complaining, but what keeps pushing markets higher? The market continues to make a run at February highs.  The latest push comes from earnings, where pessimism regarding margins and input cost pressures, the impact of Japan disruptions, slowing U.S. economic growth and government spending pressures have thus far proven to be largely unfounded.
  2. The dip in jobless claims was less than expected. Weekly jobless claims fell, but came in above consensus and the psychological 400,000 level.  403,000 people filed new claims, compared to expectations for 393,000.  The improvement in this number and 7,000 drop in continuing claims are encouraging, but the still elevated level suggests a still sluggish labor market recovery.
  3. Spain and Germany successfully auctioned debt earlier this week. However, troubles continue for peripheral European nations, most notably Greece and Portugal.  Greece’s borrowing costs continue to set new record highs as the market does not believe the nation can avoid a restructuring of its debt.  Five-year credit default swaps (CDS) rose to 1,325 bps, meaning it costs $1.325 million per year for five years to insure $10 million of Greek debt against default.  Portugal’s 5-year CDS rose to +651 bps, also a new record high.
  4. Treasuries sold off yesterday on better-than-expected existing home sales data and an equity market rally. Yields rose by 2 to 5 basis points across the curve.  Later today, the Treasury will announce sizes of next week’s 2-, 5- and 7-year auctions and also conduct a $14 billion 5-year TIPS auction.  Given negative 5-year real yields, the Treasury will likely put a coupon floor on the auction of around 0.125% and therefore price the security at a premium to par.  The premium may deter some investors and result in weak auction demand.

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
Wealth Consultant

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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