"Don't look for big gains in December. The market is tired. After that, keep a close eye on the Fed.
Posted by Charley Blaine on Monday, November 30, 2009 2:36 PM
Updated: 6:15 p.m. ET
Certainly compared with a year ago, the stock market's performance in November was, well, lovely.
The Dow Jones Industrial Average ($INDU) finished the month at 10,344, up 6.5%. This was its best month since July and its best November since 2001.
The Standard & Poor's 500 Index ($INX) ended the month up 5.7% at 1,096, its best gain since April's 9.4% and the best November performance since 2001.
And the Nasdaq Composite Index ($COMPX) rose 4.9% to 2,145. Like the Dow, it was the best performance for the index since April and the best November since 2005.
Compare those numbers to November 2008, when the Dow fell 5.3%, with the S&P 500 down 7.5% and the Nasdaq Composite Index down 10.8%.
That sickly performance came as the market was in the midst of a slide that saw the major indexes fall for six straight months and 13 out of 17 months before bottoming in early March.
Twenty-nine of the 30 Dow stocks were up for November, led by American Express (AXP), Merck (MRK), General Electric (GE) and Walt Disney (DIS). The one laggard: Kraft Foods (KFT), down 3.4% because of investor concern about the potential cost of a takeover of Cadbury (CBY).
Meanwhile, 73 Nasdaq-100 stocks -- led by Steel Dynamics (STLD), up 25.5% -- and around 400 S&P 500 stocks were higher.
Of 124 large-capitalization stocks that Market Dispatches tracks regularly, 107 were higher, led by Advanced Micro Devices (AMD), up 52.4%.
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Also, 15 of the 20 stocks in the Dow Jones Transportation Average ($DJT) -- which is a good signal of where the economy is headed -- were higher. The index jumped 9%.
Seventeen of the 19 stocks in the Philadelphia Semiconductor Index ($SOX) were ahead, with the index up 4.5%. The biggest laggards, KLA Tencor (KLAC) and SanDisk (SNDK), were off 3.7% and 3.9%, respectively.
This may make no sense to anyone who looks at the economy. Gross domestic product grew in the third quarter after four straight quarters of decline, but the gain was 2.8% on an annualized basis, hardly robust.
U.S. unemployment is above 10% using the standard measure and worse when you add in workers who are underemployed or have simply stopped looking for work. Residential construction is a disaster and would be in worse shape if the government didn't offer large tax credits to buyers.
The dollar, which shot up in value a year ago as a safe haven, has fallen back to levels seen just before the 2008 financial crisis erupted.
So, is everybody crazy? Yes and no. Yes, because it looks as though the U.S. market is nearing a pullback -- something pundits have been talking about since the end of August, when the Dow was at 9,500.
The Dow moved up 8.6% since then, the 14th-best performance in the period between Aug. 31 and the end of November since 1928.
Here's the "no" part of the answer. The rally since March is built on four realities.
Investors have few other places to put their money. You can't put it in Treasury securities because interest rates are so low; the yield on a 90-day Treasury bill is 0.03% (yes, that's three one-hundredths of a percent).
There is a horrible fear that the Federal Reserve will be forced to raise interest rates to stem the dollar's fall. Or if the Fed doesn't raise rates, the European Central Bank will because the euro is as troubled as the dollar, especially against the yen. You can't put it in bonds because interest rates are so low. And there's that pesky fear about rates suddenly moving higher.
You can't put it in real estate because commercial real estate is weak, and residential real estate looks worse.
By the March bottom, the market was so grotesquely oversold that stocks became irresistible. So, speculators took deep breaths and bought, and the market turned.
The dollar's fall made commodity stocks hot, especially silver, copper and gold. Freeport-McMoRan Copper & Gold (FCX) is up 22.6% -- and 244% for the year.
The dollar's fall was a godsend for multinational stocks. This group includes the largest stocks, like IBM (IBM), up 4.8%, and Caterpillar (CAT), up 6.1%. And don't forget stocks like Amazon.com (AMZN), up 14.4%; Hewlett-Packard (HPQ), up 3.4%; and Google (GOOG), up 8.7%. Every dollar they earn abroad increases in value when translated back into U.S. dollars.
Many financial stocks have been smoking since the March bottom. Many big financial companies were in better shape than expected, like American Express, up 17% in November and 120% for the year.
Or they managed to survive the meltdown by shrewd maneuvers. Like Goldman Sachs (GS), down 0.3% for the month but up 101% for the year.
You can argue -- as do many pundits every day on CNBC and Bloomberg Television -- that many banks are still disasters and should be broken up, liquidated or whatever.
But investors know the government is terrified at the prospect of either option because no one knows if the credit markets can stand it. Bank loans have fallen 7.4% in the last year, according to Federal Reserve data. Commercial and industrial lending is down 17%. If you liquidate the banks, what replaces them in the interim?
One result: Citigroup (C) may be down nearly 40% on the year, but it's up 303% since its March low.
So, where does the weird market go next? Probably December will be flat. That idea is built on two thoughts:
The dollar isn't going to move lower. This is important because so much of the rally is a reaction to the dollar's fall.
Energy, materials and technology stocks may not move much higher. The S&P 500 technology sector index is up 51% this year. Oil has been ranging between $76 and $82 a barrel.
The real action will come in 2010, and the most important thing an investor can do is watch the Fed -- especially if you're a current believer in precious metals.
Most analysts believe the central bank does not want to raise rates until the U.S. economy starts to see real job growth, which may come in mid-2010. (Sadly, the economy does not respond to stimuli as quickly as a computer spreadsheet.) If the Fed is forced to raise rates before it wants to, the rally could stop very quickly and painfully." |
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