U.S. stocks closed the week out on a strong note as all three major indices moved higher with mid and smalls leading the way.  The S&P 500 is up in nine of the past 11 weeks and up 18 of the 23 weeks following the now famous August 27 Jackson Hole speech.   At this pace, the broad market will return to its October 9, 2007 record high (1565 on the S&P 500) by early July. 

The broad market traded lower Friday morning, until news broke that Egyptian President Hosni Mubarak and his confidant Omar Suleiman were stepping down.  At which point, the major indices turned positive.  The military is in full control now; specifically, Field Marshal Mohamed Hussein Tantawi is now running the show.  The day’s economic releases inspired the market not at all.  Instead, stocks rallied as a North African octogenarian military officer stepped down to be replaced by a septuagenarian military officer. 

Financials, consumer discretionary and industrial shares led the market higher.  Utilities and energy were the day’s losers. 

I’m not quite sure exactly why U.S. stocks rallied on the news in Egypt, it’s not like the Suez Canal was ever really in jeopardy – at least not more than it ever was.  Maybe it’s a view that full-fledged democracy will flourish in Egypt. This hope seems quite naïve to me, and even if free elections take hold I’m not sure it’s going to result in a pro-Western government; it most certainly isn’t likely to be friendly toward Israeli.  But the market doesn’t care to take an approach of historical realism these days, so such musings are not considered.

Market Activity for February 11, 2011

Sector Activity for February 11, 2011

Trade Balance

The overall trade gap widened 5.9% in December, coming in at -$40.583 billion after the $38.316 billion gap for November. 

The gap in trade is mostly due to our energy import needs; remove the crude oil component and the gap actually narrowed by a large $3 billion to -$15.285 billion, and has narrowed a massive $9.5 billion since August. 

In fact, the trend of the previous several years in which consumer spending activity (imports) vastly outpaced that of export activity has eased greatly.  This is apparent in the chart below.  The  huge domestic spending drove the ex-petro trade gap deeply negative (first taking place as the late 1990s stock-market boom inspired the wealth effect, then followed by the mid 2000s as exploding home prices encouraged consumers to pocket home-price appreciation via cash-out refis).  Now the ex-petro gap has narrowed as spending has eased relative to exports. 

So there is now quite the divergence between the overall trade gap and that of the ex-petro gap, which shows what we have here is a problem of placing too many restrictions on domestic energy production.  (Those who constantly talk about the need to reduce our trade deficits are ironically the same people who advocate restrictions on domestic energy production.)

This doesn’t only weigh on GDP growth but is simply not an optimal economic situation for the U.S.  We want to create more high-paying manufacturing jobs and the most efficient way to do that is to expand our production allowances by removing restrictions.  This will reduce our need on foreign sources of energy and help re-invigorate our labor market at the same time.  It only makes sense, which is probably why we won’t do it…until forced to do so by a crisis.

U of M Confidence

The preliminary reading from the University of Michigan/Reuters’ gauge on consumer confidence for February improved to a reading of 75.1 from 74.2 in January.  This is the third improvement over the past four months and nearly gets us back to the post-crisis high hit in June – although it remains substantially below the historic average of 86.1.

The overall index was completely driven by the current conditions survey, which improved five points to 86.8.

However, the expectations measure (which involves questions about consumer expectations of their financial position a year out, the county’s financial position a year out, and economic growth over the next five years) declined 1.7 points to 67.6.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900