The major indices ended mixed on Monday as the S&P 500 (SPX) and NASDAQ Composite gained ground for a third-straight session, while the Dow Industrials slipped for a second-straight – held back by shares of Boeing and American Express.  The SPX hit 1250 around mid-session (circled in the chart below) for the first time since Lehman went down (9/12/2008), but the market wasn’t ready to close there just yet, losing a little ground into the close.

Energy, consumer discretionary, telecom and basic material shares were the outperforming groups.  Consumer staples (the only industry group down for the day) and industrials were the laggards.

The CRB Index rallied again, hitting a new post-crisis high, fueled by the energy complex, cotton and wheat prices. 

So we hit the pre-Lehman high of 1250 on the S&P 500 yesterday.  The penultimate close at this level was mid 2005 (the antepenultimate occasion, and also the very first time 1250 was hit, being January 1999). 

Currently, S&P 500 earnings per share are 14% higher than they were in 2005, but the unemployment rate is double where it was then (9.8% today vs. 5.1% in mid 2005).  Considering this level of joblessness, can one count on a durable profit cycle?  If we can’t, then we can’t base market conviction on the fact that earnings are 14% higher than they were in 2005. Which leaves us with that unemployment rate that is twice as high as it was then and accompanied by many more issues the economy must now deal with – problems that may very well have been present in 2005, it’s just that we didn’t know about them; we know about them now.

Market Activity for December 20, 2010

Chicago Fed National Activity Index (CFNAI)

The Federal Reserve Bank of Chicago’s national activity index printed a reading of -0.46 for November after the improvement to -0.25 (which was revised up slightly from

-0.28) for October.  The decline is surprising considering a few economic data points improved for the month. 

The index using 85 individual indicators – 31 indicators improved from October, while 54 deteriorated.  Of the four broad major categories that make up the index, the employment-related components weighed most heavily as just 39,000 payrolls were added in November and the unemployment rate rose to 9.8%. 

Bottom line: What you focus on for this number is the three-month average, which pretty much held steady at -0.41 – a slight improvement from October’s -0.42  There are several levels on this measure one is supposed to look for depending on the point in an economic cycle.  Right now it is the -0.70 mark – this is the point, according to the Chicago Fed Bank, following a period of economic expansion that there is then an increasing chance of recession.   We would still have to see a couple months of significant deterioration to get us back to that -0.70 mark on the three-month average, but considering all of the support from fiscal and monetary policy it’s telling that this measure has been trending here since June (printing -0.46 or worse for four of the past six months).

Sign up to receive the Daily Insight and other Acropolis publications here.

Have a great day!

Brent Vondera, Senior Analyst