After last week’s action-packed slate of news and numbers, this week things are set to quiet down a little bit. The market passed each test to kick off November, jumping 3.6% last week. The Republican resurgence in Washington was shrugged off. The ISM survey showed continued expansion. Friday, non-farm payrolls showed unexpected strength in the job market. Most significantly, perhaps, was the Fed’s decision on QE2. Many felt the FOMC had backed itself into a corner with QE 2.0, that the market was pricing in a package worth trillions of dollars and anything short of that would trigger panic selling in the market. By making clear its readiness and willingness to intervene over the past few months if the economic recovery deteriorated, the Fed instilled confidence in consumers and investors, buoying the recovery without having to exercise its real policy tools. QE2 came in at $600 billion, lighter than early expectations, but enough to satitiate the market and send the dollar to fresh lows.
The market has now risen nine out of the last 10 weeks and 17% since the end of August, and it seems appropriate to see a period of rest and consolidation. Futures are opening mildly lower this morning in the face of a strengthening dollar. Concerns about Ireland’s debt issues and uncertainty about the upcoming G-20 conference are also being blamed for the slight dip this morning. It will be interesting to see if the market can quickly go green, which has often been the trend of late, or whether we do finally begin some sort of modest correction or rest period.
This week is light on economic news, bond markets are closed on Thursday for Veteran’s Day, and earnings season is starting to wind down. With the meat of earnings season down, the blended earnings growth rate comes in at 31% compared to the 24% expected, according to Thomson Reuters. Amid all of the hype over elections and the Fed, many have neglected a largely spectacular earnings season and its role in the recent market rally. Robust earnings growth, according to Thomson Reuters, is expected to continue over the next four quarters. When you combine a very strong earnings season, continued expectation for earnings growth, improving economic numbers and the presence of a more inflationary environment with QE2, you have a recipe for buying equities. Look to buy strong stocks on pull-backs, but also look to diversify your investments for exposure to sectors that will benefit from currency uncertainty and commodity price inflation. Precious metals should certainly be a strong consideration for any investor and mining stocks should continue to run higher. Fertilizer stocks also look set to grow considerably over the next 6-12 months.
Don’t expect too much this week as the market digests last week’s action, but take this time as an opportunity to re-balance your portfolio and position yourself for the next stage of the economic recovery and emerging trends.
*Disclosure: Long SLV, DGP, GDX, POT
