Weekly Commentary & Outlook
McIntyre, Freedman & Flynn
By Tom McIntyre
March 28, 2011
Stocks rebounded strongly last week as the sell-off of the previous week
provided investors with a good entry point.
As the charts above illustrate the Dow Jones Industrial Average gained 3% while the NASDAQ Composite jumped by 3.76%. The reason for this quite simply is strong corporate profits last year and the strong outlook for the same
this year overtaking the many problems that dominate the news these days.
The Markets & Economy
While it would be easy to focus on the negative news stories and headline concerns which dominate the media each and every day, it is time to once again focus on what moves stock prices over the long haul. Quite simply that is:
- Profits, and to a lesser extent
- The outlook for interest rates, and the outlook as to
- Future economic activity.
In this regard, last week’s report that the growth rate in the US economy for the fourth quarter rose at a 3.1% annual rate was interesting. However, the truly startling figure and the one that moves stock prices, was the report that profits rose in excess of 29% from domestic production over 2009. This was accomplished when the GDP for the entire year grew just 2.9% and employment gains were modest if they occurred at all.
Exports and federal government spending led the factors influencing this outcome. Certainly the government spending has come at a cost due to the size of the annual deficit. There will be a long-term cost associated with this once interest rates begin their inevitable rise in the years to come.
At the same time, the importance of exports and a global presence by corporate America is lost on politicians and perhaps our Administration. It is hard to believe that they cannot connect the dots of higher profits leading to higher employment. It certainly should be obvious to anyone, who is following the population changes here in America. States with low or no income taxes are growing while states with higher income taxes are shrinking.
Just this past week it was revealed that the city of Detroit has seen its population fall to levels of over 100 years ago. The City now has less than 750,000 citizens. Instead of trying to fix their problems, the mayor has called for a recount to see if the number can be goosed to over 750,000 - simply to get more federal money, which of course is borrowed but which will do no fundamental good.
Additionally, last week Caterpillar notified the State of Illinois that its recent tax hikes are making it difficult to expand or even stay headquartered in that state. Other states such as Texas or Wisconsin are itching to take advantage of this situation.
In other words, policies must change. High cost and benefit states are retaining populations looking for benefits, while at the same time people who are paying the bills are moving to where they are treated better. The sooner the states and federal government move to recognize this fact the better off the economy will be.
What to Expect This Week
The end of the quarter is approaching so there could be some window dressing for the first few days of the week.
In addition, on Friday (April Fool’s Day,) the government will report once again the employment data for month of March. The expectation is for around 200,000 non-farm payroll jobs. For my money though, if I do not see the labor force numbers growing then I will remain very skeptical that there is true momentum in the labor market. Clearly, based upon the weekly jobless claims figures, the picture has improved over last year, but I do not believe for one second that the labor markets are strong enough to lower the true unemployment rate in this country.
Overall the economy continues to grow especially based upon global demand. Our weekly look at the Economic Cycle Research Institute’s leading economic index (shown on the next page) shows the year over year growth rate dipping, but still at a plus 6.5. Thus, the outlook for the next several months continues to be constructive, but hardly anything to get excited about.
(c) McIntyre, Freedman & Flynn
