Saturday, 4 December 2004

No clear indication on US economy nor stock market

The employment numbers released yesterday by the US Labor Department showed a disappointing 112,000 increase in new jobs for November, well below the consensus forecast of about 200,000. The unemployment rate fell 0.1 percentage point to 5.4 percent as expected.

On the other hand, business activity in the non-manufacturing sector increased in November 2004, according to the latest non-manufacturing Institute for Supply Management Report On Business. The Business Activity Index for November was 61.3 percent, up 1.5 percentage points from October's 59.8 percent.

A 1 December SmartMoney review of several Wall Street analysts' forecasts on the US stock market's prospects showed no clear consensus.

Charles Schwab's Liz Ann Sonders was one of the more bullish analysts. She essentially argues that many investors will feel flush this time of year as they receive their year-end bonuses. The liquidity from these bonuses and the entry of those investors who have been waiting for a dip in stocks should boost stocks during the final month of the year, she argues. Sonders also argues that technically, the post-election rally that broke the previous downward trend is an indication of better things to come.

Lehman Brothers' Henry Dickson is also feeling optimistic. He is sanguine about the expected 2005 profit slowdown. According to him, since 1950, there have been 12 major episodes of year-over-year profit-growth deceleration from peak to trough, of which on only three times has that led to negative stock returns. "Decelerating profits are not necessarily ruinous for the stock market's prospects," he writes. "The market is much more correlated to changes in valuation, P/E ratios, and the like, than to changes in earnings momentum."

Smith Barney's Tobias Levkovich is less sanguine about the profit slowdown. He says that analysts have not reduced their estimates sufficiently for next year. When that finally happens, stock prices will likely slide. However, he thinks that that would put the market at fair value and represent a compelling buying opportunity for investors in 2005.

Merrill Lynch's Richard Bernstein is concerned about the Federal Reserve's intention to withdraw liquidity. He thinks that at such times, lower-quality stocks tend to underperform. On the other hand, if profits were to re-accelerate in late 2005 or 2006, they might be a counterbalancing force to the Fed's restrictive policies and make lower-quality stocks more attractive.

So there is not much consensus on Wall Street at the moment for the investor to follow or take a contrarian stand against. Make your own assessment and bet accordingly.

1 comment:

Barry Ritholtz said...

The employment #s reveals how most people tend to overemphasize recent data. The October #s -- clearly a hurricaine induced aberration -- threw off the thinking (or perhaps revealed the absence of it) of many commentators: There's more on this subject here:

Also, if you want to consider a rather esoteric technical pattern that could show how the markets rally into 2005 nad then utterly collapse, check out this graph:

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