Market Updates: Tricks and Treats

This post was originally published in the Washington Business Journal’s WBJBizBeat Blog. | Washington Business Journal

After a scary third quarter in the global financial markets, U.S. equity markets are poised for the largest monthly rally since October 1974. The recent rally has put the treat back in ‘trick or treat’. Why the strength? Continued resilience in the U.S. economic numbers along with fairly good company profit numbers. But, it still all comes down to Europe. After months of extreme fear, investors began to anticipate and were relying on a comprehensive assistance plan from Europe. Finally last Thursday, European leaders reached agreement on an improved EU bailout/assistance plan. EU leaders agreed to restructure Greek debt (50 percent write-downs), boost bank capital and leverage a government-backed bailout fund of 1 trillion Euros. But still, the devil is in the details and many are afraid the measures do not go far enough or that there are more skeletons in the Euro closets.

In the days following Halloween this week, look for news out of the G20 summit, the employment numbers on Friday and ISM reports on service and manufacturing. Over the next 4 weeks, look for news from the super-committee charged with finding $1.2 trillion in U.S. budget savings by their Nov. 23 deadline.

The treat: University of Michigan consumer confidence reading unexpectedly rose in October to 60.9 from 59.4 in September. The forecasts had been in the 58 range. Consumer spending makes up the largest piece of the US economy and it is likely that the improving equity markets and lower gas prices have fueled this improvement.

The trick: There is more than one confidence study. The New York-based Conference Board’s household sentiment index slumped to 39.8 in October, the lowest level since March 2009. So, who to believe?

When you feel good about things, you are more likely to spend money. In September, even with steep equity declines, the consumer spent more dollars. Purchases increased by .6% after a .2% increase in August and with incomes rising less than projected, the consumer’s saving rate fell to the lowest level in nearly 4 years.

Will the consumer buy a home? It seems like they will, if the price is right. New home sales rose 5.7 percent in September as discounted prices lured buyers in some parts of the U.S. The median new home sale price was down 10 percent from September 2010. The S&P/Case-Shiller index of property values in 20 cities fell 3.8 percent from August 2010.

GDP: The value of all goods and services produced rose at a 2.5 percent annual rate, up from a 1.3 percent gain in the second quarter. Helping to ease the fear of a double dip recession, this fast pace has been fueled by consumer spending and business investment.

Durable goods: GDP and durable goods orders typically go hand in hand. Durable Goods orders excluding transportation (airplanes and autos) climbed 1.7 percent, well above estimates of .4 percent. This was the largest increase in six months and is providing strong support for GDP and consumer confidence.

Munis: Munis are still cheap relative to Treasuries, but with a recent back up in 10-year T rates, the ratios are not quite as attractive (still over 100 percent though.) Credit confidence in muni issuers has remained strong, despite one off credit headlines such as Harrisburg PA. One stat helping muni credits is the level of tax collections at the state and local levels. U.S. state tax collections are heading for their seventh-straight Q of growth, according to preliminary data released by the Nelson A. Rockefeller Institute of Government. For the fiscal year ended June 30 (used by 46 states), revenue rose by 8.4%, the biggest annual gain since 2005. However, projections are for weaker growth in the next fiscal year.


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