U.S. stocks began the year on a strong note, following European bourses that had rallied for two days straight (many overseas markets were open on January 2, unlike ours) – although those euro markets did erase some of Tuesday’s early gains late the session after Greece threatened once again to leave the zone.  An interesting note:  The S&P 500 immediately opened up 12 points to 1272 (before extending that gain), which was where the index closed the first trading session of 2011.  We finished yesterday five points above that mark.

Basic materials, financials and energy led the charge – energy shares were helped by crude’s $4 jump to $103/bbl and wholesale gasoline’s 7-cent advance to $2.75/gal.  Utilities were the weak link, the only sector to close down for the session; consumer staples and telecoms also significantly underperformed.

European, and to a lesser extent Asian, equity markets were supposedly juiced by stronger-than-expected PMI (manufacturing surveys) readings for both Germany and the eurozone in general.  Nonetheless, the measures remained in contraction mode.  German PMI printed 48.4 for December and eurozone PMI printed 46.9.  Anything below 50 means contraction and this marks the third-straight month at sub-50 for Germany and the fifth-straight for the eurozone in total.

In addition, Asian PMIs remain in contraction mode pretty much across the board, India is the only major economy to buck that trend.  And from a more broad perspective, the entire Singapore economy has contracted for the second quarter in three.  As a result, I’m not so sure overseas stock markets were strictly propelled by the manufacturing data even as this was the way things were parroted by the media.  And as mentioned above, the bloom came off the rose a bit after Greece returned to its childish threat of taking its drachma and going home if the next bailout installment is not quickly agreed upon.

Anyway, the more likely reason behind the recent bounce is early-year positioning into equities by fund managers.  This is the way the first trading session has played out for four years now; it’s important to note that this streak includes the terrible late 2008/early 2009 market as it began the new year up 3.16% in the first trading session. It ended up being a good year from a low level, but not before sinking 25% by early March (the total plunge was 57% from the 2007 peak).  A lot of people throw predictions around regarding how we start off the year, but one should be careful in getting to simplistic in the extrapolation.

Market Activity for January 3, 2012

Sector Activity for January 3, 2012

ISM Manufacturing

While European and Asian gauges of manufacturing activity remain in contraction mode, here in the U.S. the nationwide look continues to print expansion.  The ISM (that national look from the Institute for Supply Management) reading came in at 53.9 for December, up from the 52.7 for November and better than the 53.4 expected.

Many of the sub-indices of the report looked good as production rose 3.3 points to 59.9; new orders gained nearly a point to 57.6; employment gained 3.3 points to 55.1 and export orders rose a point to 53.0 (surely helped by the large jump in commercial aircraft orders we saw via the latest durable goods report).

Unfortunately, the backlog of orders remained in contraction mode – up three points but still below 50; and inventories slipped further by falling 1.2 points.

The next test comes when the January reading shows whether or not there’s a payback effect from the possibility that firms pushed more spending forward into 2011 to take advantage of the higher depreciation allowance – that tax advantage expired on December 31. 

Fed Minutes

The notes from the December 13 FOMC meeting (for new readers, the FOMC stands for Federal Open Market Committee and consists of the members that decide on monetary policy for the Federal Reserve System) didn’t reveal much we didn’t already glean from the concise statement that summarily followed that meeting.  Hence, there wasn’t much of an immediate market reaction when those “minutes” were released.

What we know is the FOMC believes “downside risks” to economic activity remain elevated, largely due to the European debt crisis (namely counterparty exposure that our banks and financial institutions have to troubled European banks).  We also know that the members that will be rotating into the Committee for 2012 will result in an increasingly dovish FOMC – meaning they will error on the side of too much accommodation rather than on the side of removing some of the unprecedented level of monetary stimulus that is already in place.

And on that note, the minutes mentioned that individual members’ views of how long ZIRP (zero interest-rate policy) should remain in place will be made public – starting at the close of their next meeting on January 25..  This pretty much sets the stage for the FOMC to announce that fed funds will remain at the zero bound beyond the heretofore stated “mid-2013” timeline.  And with the Committee picking up three doves (replacing the three hawks that have been dissenting to the current policy stance), one can more than assume that additional QE is coming.  As we’ve been talking about for a while now, this next round of QE will likely be intensely focused upon driving mortgage rates even lower.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900