The market launched last Thursday, capping the biggest month in twenty-five years.
The Dow was up more than 400 points at one point; oil was up four percent (up 24 percent since October 4th). Copper was up five.
Like Daniel waxing the car in the Karate Kid movie: risk off, risk on, trade back on.
The Russell 2000 Index, which follows small companies, added 26 percent over the last month alone!
We know from history that small caps lead the market out of recessions, corrections, and muddy ditches.
Thursday’s big market rally was based on the idea that Europe had formed a grand compromise on its debt issue. The pain would be shared; the banks would take a fifty-percent loss on their loans to Greece, and a new European bailout fund would be created.
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There was a series of good news…
Consumer spending in the U.S. accelerated in September, but savings rates fell. According to Bloomberg:
Purchases increased 0.6 percent, matching the median estimate of 81 economists surveyed by Bloomberg News, after a 0.2 percent gain the prior month, Commerce Department figures showed today in Washington. Incomes rose less than projected, sending the savings rate down to the lowest level in almost four years.
Visa saw double-digit revenue growth in the last quarter. Retail sales were up 7.9% in September. Kohl’s and Macy’s are hiring again, betting on a solid Christmas, and Caterpillar is saying America is growing.
Auto sales were up: GM reported a 19.8% increase in sales; VW’s U.S. sales jumped 36%.
Earnings are coming out very well across the board. The S&P has shown a 16% earnings growth in the third quarter. ExxonMobil saw profits climb 41 percent.
GDP growth came out at 2.5 percent. Philly Manufacturing blew it out to the upside. The index rose to 8.7 in October from a negative 17.5 in September, which means the fears of a double dip are about as scary as the Cowboys were last night…
Don’t get me wrong; there are still plenty of problems.
Consumer confidence fell off the table, which doesn’t square with the spending. The dollar dropped as investors rushed out of the safe play and back into risk.
This accounts for much of the move in commodities.
A falling dollar is bullish for U.S. exporters.
Last week’s biggest winner in the blue chip category was Alcoa (AA). It jumped from $10.10 to $11.60. Of course, the stock has been hit hard by the recession and never made it back. It was trading at $45 in 2008 and only climbed back to $18.47 by mid-summer.
Everything bad that could happen to it did. A third of its income comes from Europe. The company’s costs were up on high oil prices, China slowed, and Boeing kept delaying its order fulfillment.
The upshot over the past two years was weak aluminum demand, falling aluminum prices, and a third-quarter earnings report that fell short of Wall Street expectations.
That said, buying low is half the game.
But if you are looking to buy solid companies when they are down — remember when GE was $5, Apple (AAPL) was $20, and McDonald’s (MCD) was $18? — you should put some of your safe long-growth retirement funds into AA. We aren’t talking Kodak (EK) here.
We are at the point in the downturn where the current talking points don’t mesh with the reality.
The media loves to interview the family with kids who’s lost their jobs, killed their dog, and has to support grandma in the basement. They write this stuff even when unemployment is 5 percent and the market is hitting new highs.
There are riots on Wall Street during bottoms, not tops.
I graduated in the teeth of the 1993 recession. You heard the same complaints from twenty-somethings we hear now: high debt, no jobs, having to work at the Gap, etc.
With no ready employment, I moved to a ski resort to run the lift line and work on my moguls. You can do that as a young, single guy. I imagine there are plenty of people doing it now…
Then the market turns.
The next thing you know, your friends are getting well-paying jobs in their field. Someone knows someone, or your resume hits the right desk and boom! — you get your foot in the door and you’re on your way to owning a piece of the American dream.
The next major upside catalyst is jobs growth.
The last report showed 103,000 jobs created in September. It may be that there won’t be any for October, either. Then again, it may be that we get a surprise like we did with GDP — or we may have to wait until November…
But when unemployment turns, it will turn fast.
One solid jobs number and the Dow gets another 400-point up day. Commodities will rally hard. Risk will move down the value chain into the small caps — which, as shown above, lead the market out of the doldrums.
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Keep your stick on the ice,
Editor, Wealth Daily