The major U.S. stock indices ended mixed on Friday as the Dow Industrials and S&P 500 gained ground, while the NASDAQ Composite declined again.  Mids and smalls also struggled, pulling back meaningfully for the week.

Stock prices were actually helped by a better-than-expected German confidence reading and profits out of General Electric (although revenue was up just 1% and 25% of Q4 EPS was due to a one-time tax advantage).   Looking beyond the headlines can cause one to doubt the durability of this profit cycle, especially as comps get much tougher to beat in a couple of quarters. 

Industrial, financial and energy shares led the broad market higher.  Tech, basic materials (down 3.32% for the week) and utilities were the laggards. 

The Dollar Index (DXY) got hit hard, down eight of the past 10 sessions, on that German business confidence reading – the DXY closed in on the 77 handle on Friday; it’s getting a little support this morning due to some euro weakness.  I consider the 75 mark as the danger zone (the Chinese, the largest foreign owner of our government bonds, are likely to ramp up their rhetoric around that level, the chance of a full-blown currency war increases, import prices will surge and the Fed will loses more credibility).  The dollar still enjoys safe haven status, so when the next round of big concerns over European debt problems roll, the greenback will see rally again – but this is hardly the reason we want our currency to find support. 

As the dollar weakened, the CRB Index gained enough ground to erase the prior two sessions of decline to close the week higher.  Agricultural commodities led the CRB higher.  The price of cotton, closing back in on that all-time high, also drove the index higher – this isn’t part of the ag complex but the industrial component of the CRB.  Energy prices on the whole gained too. 

For the week, the Dow gained 0.72% (extending its streak to eight weeks); the S&P 500 fell 0.76%, ending its streak at seven weeks; and the NASDAQ Composite tumbled 2.39%, ending a two-week streak.  The S&P 400 (mid cap) declined 1.79% (has had only three down weeks over the past 19 but the last two occurred over the past month).  Smalls got drubbed as the Russell 2000 lost 4.26% and the S&P 600 slid 3.66%.

Market Activity for January 21, 2011

Wrap Up

We didn’t have an economic release on Friday but it was an important week as we received data on factory activity, the housing market and of course jobless claims. 

The first two regional manufacturing surveys for January showed new orders continue to grow at a solid-to-strong clip, but the price measures illustrate cost pressures are increasing and factories are beginning to pass these costs downstream.  It will be interesting to watch if end-use prices follow suit in this environment of very little pricing power.  If so, the Fed’s going to have additional problems on its hands.  If not, then profit margins will compress.

The bulk of the week’s housing data was negative as residential construction starts (which is the segment of housing that affects GDP) and the NAHB’s housing market gauge both posted readings that correspond with a major supply glut.  The existing home sales data appeared to make things look better for the market as they rose back above the five-million mark at a seasonally-adjusted annual rate (that’s more of a normal reading).  However, these sales were contracts signed in October and November when the 30-year mortgage rate hit its all-time low of 4.21% and averaged $4.30% during the timestep.  Interest rates remain extremely low but the market has become conditioned to silly low levels, so we’ll see how things turn out for January and February sales – the mortgage applications numbers of the past six weeks haven’t painted a good picture, down 10%.

Really the best news of the week was the 37K decline in initial jobless claims.  That brought the figure back down to the 400K level (404K to be exact) and removes the concern that we may pop back up to 450K (as the previous week shot up to 445K).  While a level around 400K suggests monthly payroll growth will continue, we need something closer to 300K to really believe we’ll see the consistent level of payroll growth that is necessary to drive the unemployment rate lower in a timely manner.  Still, the improvement is meaningful. 

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900