Schwab Market Perspective: Down the Home Stretch
Liz Ann Sonders
Senior Vice President, Chief Investment Strategist, Charles Schwab & Co., Inc.,
Brad Sorensen
CFA, Director of Market and Sector Analysis, Schwab Center for Financial Research, and
Michelle Gibley
CFA, Senior Market Analyst, Schwab Center for Financial Research
November 12, 2010
Key points
- Economic data has shown signs of strengthening. We believe we could be emerging from the soft patch and that stronger-than-expected growth could be in the offing.
- The elections are done and the Federal Reserve made its move, but the question remains as to whether much-needed confidence returns to businesses. Additionally, housing remains a problem that may not be helped substantially by either event.
- Competitive currency devaluations are dominating the international conversation, while investors are flocking to emerging markets, making us a bit skittish in the near term.
The midterm elections in the United States are over, the Fed announced a new round of quantitative easing (QE2—injecting cash into the economy and pushing rates lower by purchasing Treasury securities), and the final earnings reporting season of the year has come and gone. So what happens as we head toward the end of the year?
First, it's important to remember that equity investing should be viewed in a longer-term context, with a three-to-five year time horizon. Also, this is a good time of the year to make sure your allocation aligns with your risk tolerance and make adjustments as necessary, keeping tax considerations in mind.
We've been optimistic about the prospects for the market for some time and continue to believe the general trend of the equity market will be higher. However, we expect, and would like to see, a pullback in the near term as some technical and sentiment indicators are getting to levels indicating we may be stretched.
A bit of a retrenchment could set the stage for the next run higher. Election-cycle seasonality between now and the third quarter of next year is very supportive for equities, but we do caution that trends are not guaranteed, as we saw in September of this year, which posted robust gains despite, historically, being the worst month of the year.
Is the soft patch ending?
Our optimism has been supported of late by economic data that is largely improving. The Institute for Supply Management (ISM) reported that its Manufacturing Index improved in October to 56.9 from 54.4, above expectations. Additionally, some leading indicators within the report also showed surprising improvement. New orders jumped to 58.9 from 51.1, while inventories dropped to 53.9 from 55.6, resulting in the new order/inventory ratio improving, which has been a good indicator of future activity.
Forward Indicator Looking Better
Click to enlarge
Source: FactSet and the Institute of Supply Management, as of November 9, 2010.
On the service side, which makes up close to 70% of the US economy, the ISM Non-Manufacturing Index also improved, moving to 54.3 from 53.2. Employment readings in both indexes also posted improvement, providing some hope for future job gains.
There are other glimmers of improvement, although the overall job picture remains sluggish, with the leading indicator of initial jobless claims only recently breaking below the 450,000 range, which has typically coincided with a relatively flat labor market. The October labor report did surprise on the upside, showing that although the unemployment rate remained at 9.6%, private payrolls were up by 159,000.
