Saturday, November 01, 2014

After a sharp two week U.S. stock market rally, what's next?

After experiencing the largest correction of the year in the S&P and in the Russell 2000, that is now recent history.  Since October 20th the market has bounced back, led by large caps, transportation stocks, and technology stocks.  How fickle the market has become.  It almost seems better just to ignore it.

There are such inconsistencies in information.  Yesterday a consumer sentiment survey showed that consumers were more positive than they have been since July of 2007.  Today October consumer spending was reported as the weakest in eight months.  If all of the negative global news and fears about the mid-term elections have had an impact on consumer spending that will end soon. The holidays are coming and the usual discounts will begin to become more pronounced in stores and online. The elections will be over and likely fade as an issue.

Looking at global economic impacts on U.S. confidence, a modest slowdown in China's economic growth is widely expected and already discounted in stocks, one would think.  Europe's fight to avoid widespread economic stagnation is ongoing and well known, and at this point it is entirely possible that Merkel will find some way to both blink and save face.  Ukraine remains an issue, one that could lead to a dysfunctional European market, but unless something happens that can be seen as a complete breakdown of cooperation there will be no spread to U.S. markets.  Watch the oil and gas agreement with Russia that is just being finalized, supposedly.

The U.S. corporate earnings season is almost completed and, with a few important exceptions, results have been close to or ahead of expectations. Job growth is moving in the right direction.  What the U.S. needs, as Janet Yellen tells us repeatedly, is discernible wage growth.  If the holiday season brings us that nicely wrapped present, the market still can move higher.  Stepping out on a limb here, but this could be the best holiday season in seven years, and if so why wouldn't there be some competition for employees.  

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