Don’s Outlook 11/20/09
All eyes are on the U.S. dollar, the principle scapegoat for the ongoing appreciation of most asset classes, from stocks to bonds to gold. Monday illustrated this point, as even Treasuries gained ground while stock and commodity prices took their cues from the currency markets and some uncharacteristic comments by the Federal Reserve chairman, Ben Bernanke. Speaking before the Economic Club of New York, he reiterated the standard Federal Open Market Committee line, which states growth is under way even though risks persist, and that interest rates will remain low as long as necessary.
Bernanke did diverge, however, to comment on the U.S. dollar’s slide. The value of the dollar does matter, so much as it relates to the Fed’s dual mandate of maximum employment and price stability. Bernanke also raised eyebrows by making uncharacteristic remarks regarding asset prices in general (e.g. stocks), saying that he did not see any large misalignments anywhere in the financial system.
Other economists have noted the absence of valuation misalignments in either global equity or credit markets, indicating that good fundamentals, not leverage, are responsible for the strong gains in asset prices. The reductions in volume, margin trading, and derivative use are reflected in the nominal growth of the financial sector, which otherwise would be ballooning if speculation were at the root of asset appreciation. Instead, economic recovery, cost reductions and emerging market strength are supporting this return to normalcy.
The Dow Jones Industrial Average has remained a clear leader since the Dow’s mid-October rally brought the index back above 10,000 for the first time since it plummeted in October 2008. Barron’s presented some interesting research that slices and dices the Dow into different groups of stocks, all of which point to an upward trend.
First there are stocks such as American Express (AXP), which are building upon a clear upward trend, that have shown both solid momentum and volume. Next are firms such as DuPont (DD), which are breaking out to new highs after having traded in a range-bound manner while the broader market had moved higher. The upward trendlines have held, thus ensuring that stocks like DuPont continue participating in the bull market.
Finally, there are stocks such as Boeing (BA), which is recovering from a pullback and breaking out, or like Johnson & Johnson (JNJ), which has turned a failed bearish technical signal into a bullish one. Both of these groups of stocks could have been early signs of failure, but they have found support and are chasing the Dow’s leaders. Either the equity or debt of all these companies is represented in the diversified portfolios of most clients through funds such as Federated Strategic Value (SVAAX), Federated Capital Appreciation (FEDEX), ETF Market Opportunity (ETFOX), or MDT Balanced (QABGX).
