It was a mixed week among economic indicators. Among those giving optimism were GDP for the 3rd quarter, showing gains to 3.1%; higher after tax corporate profits, up 17.9% year-over-year.
-Frank James, founder, James Investment Research, Inc.
Stock Market Analysis
Conclusions: Stock indices rose throughout the week aside from Friday, rising as much as 3% for small cap stocks. Among the sectors, prices generally rose except for consumer staples, health care, and telecommunication services. Commodities were mixed to lower, the losses occurring mostly in precious metals and industrial metals...
It was a mixed week among economic indicators. Among those giving optimism were GDP for the 3rd quarter, showing gains to 3.1%; higher after tax corporate profits, up 17.9% year-over-year. The Chicago Fed National Activity Index rose to a positive 0.105 reading. The ECRI index rose. Durable goods orders were ahead 2.9% and personal income rose as did real personal spending, from October’ -0.2% to 0.6% in November. Vehicle sales rose to a level of about 15.7 million annually, and best of all non-defense capital goods orders rose 2.7%. This series is often thought of as a proxy for business investment and is correlated with employment.
Against these positive readings we have reports of decreased savings, lower readings for the Kansas City FED index, lower leading economic indicators, and the accurate Coincident/Lagging index which declined to 89.3
We haven’t solved the problems of the country but, as we mentioned before, in America the consumer debt burden is lessening, the natural tendency of Americans is to consume, and business people desire to grow. If Washington policies are encouraging, growth will be faster. But even without the encouragement, consumers will consume and business firms will aim for growth.
Part of the long term optimism we feel lies in the demand for new plants which will permit firms to take advantage of newly found cheap energy. For example, Orascom Construction, the largest company in Egypt, plans to spend $1.4 billion setting up a fertilizer plant in Iowa, to be near the source of natural gas. Dow Chemical will spend over $2 billion on a plant in Texas to produce plastics, once again exploiting cheap natural gas into plastics. In the process, 2,000 construction jobs are to be created before the plant is completed, according to the Wall Street Journal.
The majority of the economic reports are positive, suggesting a renewed period of moderate growth, not an immediate drop into a contraction early in the year. Later in the year the drag of higher taxes, more regulations, faltering export markets and anti-business policies from Washington will be felt. It is likely that some of today’s increased activity may be deliberately taking sales away from next year, thereby avoiding 2013’s tax and regulatory bump. But for now, we follow our leading intermediate term stock indicators which remain positive even in the face of likely short term volatility.
F James, Ph.D.
Bond Market Analysis