U.S. stocks closed flat on Monday after a late-day decline wiped out what were mild gains for most of the session.  It’s pretty much like the session never existed, for the broad market at least – virtually unchanged on nothing volume.  The bond market was closed due to the observance of Columbus Day, which explains the quiet session for equities. 

Telecom, energy and consumer discretionary shares were the top-performing groups.  Industrials, basic material and financial shares were the three groups to close down for the session.  Commodity-related basic material shares fell even as commodity prices continued to push higher, but these stocks were due for a breather; the group is up 15% since the Fed all but signaled they’re going balls to the wall in late August – and please, that’s a steam engine reference (and aviation more recently) so spare me the inappropriate comment claim.

Trading activity was very weak as volume on the NYSE was 36% below the six-month average.

The 2010 Nobel Prize in Economics was shared by three economists: Peter Diamond, Dale Mortensen and Christopher Pissarides.  The three have worked on the efficiency of recruitment and wage formation as well as labor-market regulation. 

So Peter Diamond suddenly wins the Nobel Prize just six months after President Obama nominated him to the Federal Reserve Board – seems a bit convenient.  The nomination was rejected by the Senate, but now that he is a Noble Prize winner do you think his chances are a little better this go around?  The President resubmitted Diamond’s name on September 13.

Market Activity for October 11, 2010

The Week’s Data

It will be a pretty big week on the data front, bookended by the three most important releases of the next four sessions as we get the NFIB’s small business confidence reading today and September retail sales and Empire Manufacturing on Friday.  We’ll also see third-quarter earnings season get rolling, but this really a multi-week story that will either corroborate the bounce in stock prices or pressure the market based upon company guidance.

Touching on a couple of the data releases:

We’ll watch the NFIB reading to see if we can make it above the 90 mark.  This is a recessionary level and we’ve been stuck below 90 for longer than any time in the survey’s history, which goes back to 1974.  I say that, the survey did bounce above 90 (hitting 92.2 in May) but summarily declined again – something else that had never before happened in the survey’s history.  This gauge is important simply for the fact that small business is such a huge engine of job growth.

We’ll round out the week with retail sales for September.  Consumer activity has bounced from the weakness we saw in May and June and as this segment of the economy accounts for 70% of GDP it is very important from an economic growth standpoint.  I suspect activity will hold up through year end, but when stocks slide again and home prices endure another round of decline (something that will probably be delayed as foreclosures are being halted) the consumer will retrench again.  Remember that household debt levels (relative to disposable income) remain very high and the weak labor market makes that repair difficult. 

Friday will also bring the latest from New York-area factory activity for October.  This is the first regional we’ll receive for the month and it is essential the Empire reading remains in expansion mode.

Or is it?  With the Fed ready to buy up another $1-1.5 trillion in Treasuries, it’s tough to say.  Maybe slumping factory activity actually causes stocks to rally – again, for now – as the market sees the Fed will pump even more liquidity into the system. 

Let’s hope factory orders hold up because the further the Fed goes in QE, the more difficult the pay-the-piper moment becomes down the road.  What are these costs?  We’ve got the consequence of riskier assets rallying for reasons that are artificial; the hit the economy takes from higher commodity prices; and even if this all works out as planned (which I think is highly unlikely) then the economy expands in a lasting fashion and the Fed eventually has to take these unprecedented levels of easing away – and we know how things turned out when they removed the previous easing campaign. 

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Have a great day!

Brent Vondera, Senior Analyst