It was another sort of puzzling but nonetheless bullish week of equity trading this past week, as the week’s modest gains happened to occur amid a whole lot of economic worries and unsettling economic developments. Whether you took into account the fact that oil hit the $90 level for a barrel, or the fact that interest rates continued to climb northward, or the violent protests over in Europe, the stock market continued its northward climb, to leave the Standard & Poor’s 500 index close at its highest level since September of 2008. You would think with all the talk of our country’s deficit worries, the European sovereign-debt concerns or fears of a double dip recession that the markets would head south, but hey who cares, it’s the Christmas season. As it now stands, the bears are on their heels and it just might continue that way through year’s end. But hey, who’s complaining?
As the week came to a close, the Dow Jones Industrial Average rose by 0.25% to a level of 11,410.32 and the Standard & Poor’s 500 closed higher by 1.3% to 1,240.40. That was its highest finish since September 19, 2008, just after the Lehman Brothers brokerage firm imploded. Meanwhile the tech-heavy Nasdaq Composite Index rose 1.8% to 2,637.54 and the year-long trend of the smaller cap stocks beating up on the larger cap stocks continued. This past week it was a case of, “the smaller the stock the better it did.” The Russell 2000 index, made up of these small caps, rose nearly 3% for the past five trading days, and now sits at the 776.83 mark.
On a year-to-date basis, here is where the major indexes now stand with roughly just two weeks to go in the year: Dow Jones Industrial Average, +9.42%; S&P 500, +11.24%; Nasdaq Composite, +16.23%; Russell 2000, +24.22%.
When it came to interest rates, Treasury yields saw their biggest weekly leap in nearly 18 months. The upswing in both medium- and long-term interest rates accelerated after President Obama agreed to stave off the sharp rise in income-tax rates slated for January 1, and reached a deal on various other plans to boost the economy. Thus the benchmark 10-year Treasury note yield vaulted nearly 32 basis points to 3.334%, the bond’s biggest one-week in case since 2009. (A basis point is a hundredth of a percentage point.) What makes the bond market’s retreat all the more stunning is that it occurred in the face of the Federal Reserve’s program to purchase $600 billion of those securities. Ironically, the backup in yields has been most prevalent in the intermediates’ maturities, the very ones that the Fed has been buying. The two-year note yield has nearly doubled from its 2010 low of 0.332%, to 0.648% Friday. It was the same for the five-year note, as it ended the week at a yield of 1.998%, up 38.4 basis points for the week. Even on the long end, the 30-year bond’s yield also jumped by around nine basis points to a mark of 4.441%. In conclusion, all of these fiscal measures will diminish the chance that the Federal Reserve will go beyond the $600 billion in Treasury purchases in so-called QE2 with a QE3. All of which will in all likelihood add up to even higher interest rate yields in the future.
On Capitol Hill, it was certainly an exciting period of time as both President Obama and the Republican congressional leaders fought to compromise on raising the estate tax exemption to $5 million ($10 million for couples,) with a maximum 35% tax rate on the balance. In real terms, this is the equivalent of a full exemption for the majority of Americans, so that’s great news. On the flip-side of the coin, the bad news is that these new rules are only effective for the tax years of 2011 and 2012. Beyond that time period, we still don’t know what the ‘lay of the land’ will be as to these exemptions, which will obviously create more uncertainty as to long-term planning. In addition to revisions in the estate tax rules, it looks like the Bush tax cuts for all taxpayers will be extended for a period of two more years. This keeps any dividends received taxed at the 15 percent federal rate as opposed to ordinary income rates which could be as high as 35 percent. In addition, Obama and the Republican congressional delegation agreed to extend benefits for the long-term unemployed for 13 more months! Keep in mind that the final bill on these items still needs to be hammered out in committee meetings and passed by both houses, but for the time being, it’s a great start.
In addition to the ongoing earnings reports, this coming week will also include some important economic data points as well. On Monday we’ll get a key vote on the above mentioned proposal to extend the Bush-era tax cuts and to add a temporary cut in the payroll tax on the Senate floor. On Tuesday we’ll get the November producer price index and November retail sales. On Wednesday, its November consumer price index, November industrial production, and November capacity utilization tallies. Thursday brings us November housing starts and the December Philadelphia Fed survey, and on Friday we close out the week with the November leading indicator figures.
As we head into the final two trading weeks of the year, I know I’ll take whatever good fortune comes our way that keeps this impressive stock market rally going. In addition, I for one will clink my champagne glass to celebrate this ongoing bullish market as we head into the New Year!
Sources: Barron’s, The Wall Street Journal, CNN, The New York Times, The Financial Times, Briefing.com, The Kirk Report