U.S. stocks rallied Tuesday, led by the banks and a slight decline in oil prices.  It was a mirror image of the previous session’s performance.   On Monday the market began the session higher but quickly reversed course and closed lower.  Tuesday’s session began lower only for stocks to erase those losses just minutes after the opening bell, holding on to close higher.  It was essentially like Monday never happened as the S&P 500 ended Tuesday smack dab at Friday’s closing price of 1321.   

Banks rallied on news that the Senate is drafting legislation to delay the cap on debit-card fees (a measure that is currently set to take effect in July and would cost banks and estimated $12 billion/year). 

Oil prices pulled back just a bit as OPEC members convened to discuss the possibility of higher production quotas, ostensibly to helpe ease energy-price concerns. (Of course the aim is hardly one of altruism, but rather to take advantage of the 24% jump in crude price over the past three weeks – if only U.S. policymakers would allow more domestic production).  But we don’t have a supply problem, we have a geopolitically-driven spate of intense uncertainty that’s got the market somewhat on edge and commodity traders pushing energy prices higher.  Thus all eyes will be on the March 11 “day of rage” protests in Saudi Arabia as that is the ultimate flashpoint country – even though it appears the monarchy’s able to put the kibosh on uprisings in the kingdom. 

Financials, telecoms and industrials led the charge yesterday.  In fact, half of the 10 major industry groups outperformed the market as basic material and utility shares also beat the broad market.  Energy was the only group to close down as traders took profits from what’s been the best-performing sector for the year. 

So today marks the two-year anniversary of this rally from the nefarious 13-year low of 666 on the S&P 500 -- hit intraday March 9, 2009 (closing that session at 676).  The current level of 1321 puts the index up 98.3% from that low. 

This marks the second-strongest two-year rally over the last 85 years.  The strongest rally for a similar timestep also occurred during a nasty secular bear market when the S&P 500 rallied 127% during the nearly 24 months that ran March 14, 1935 – March 10, 1937.  A year later, by March 31, 1938, the index was lower by 54% (chart below).  But then it didn’t have Bernanke and the greatest Federal Reserve equity-market backstop in the history of developed-economy central banking going for it either – traders feeding at the trough of $3.8 billion/day in QE2 manufactured liquidity. 

Then:

Now:

Market Activity for March 8, 2011

Sector Activity for March 8, 2011

NFIB Small Business Optimism Index

The National Association of Independent Business reported that their small business optimism index inched higher for the fourth month in five, but remains well below average.  It’s taken the measure longer than any time in its 36-year history to return to the average of 98.6 – and we’re still counting. 

For February, the measure rose nearly a half-point to 94.5 from 94.1 in January as five of the major 10 components rose, three declined and two were unchanged.

The plans to hire, expect higher sales, positions not able to fill, higher selling prices and inventory satisfaction measures all rose for the month.  The employment figures are pointing to more hiring among small businesses.

However, while respondents expected higher sales on net, the expect a better economy measure declined.  Also, the good time to expand and positive earnings trend figures declined.  So the report remains quite conflicting.  It’s much like what we’ve seen within most the consumer confidence readings where the expectations numbers are improving more than the current conditions figures.  So there’s hope out there, but we need to see it feed into reality. 

Then we have that higher selling prices reading that exploded from -4.0 in January to +5.0 on February.  This shows that the cost-push inflation ingredients are there.  Will firms actually be able to raise prices in this environment?   If they can’t, they’ll eat these costs and profit margins will compress.  If they can, then we’ll have an inflation problem on our hands unless commodity prices chill out. 

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900