The Markets
Last week’s strong auction on the 10-year Treasury bond pushed yields back down below 4.50%, extending the relief rally in equities to a fourth straight week. The decline in yields, along with the recent drop in oil prices renewed hopes for a year-end rally. For the week the Dow gained 80 points (+0.75%) and closed at 10766. Continued positive news from Intel, Microsoft and other tech heavyweights triggered a continued rise in the NASDAQ, pushing its way into positive territory for the year. For the period, the NASDAQ gained 25 points (1.12%) and closed at 2227.
Market indicators, while improving, are still sporting a neutral bias at this time. Growth segments of the market (such as the NASDAQ composite and small cap indexes) are still sharply over-bought; however, momentum indicators have improved to a more neutral posture. All told, the recent market advance has managed to bring the major market indexes above breakeven for the year. With much of the earnings news already factored into the markets, seasonal effects (such as year-end portfolio adjustments) may be the last remaining catalyst for the markets.
The Appleton Group Portfolios™
The market’s recent volatility, to say the least, has been dramatic. Over the past six weeks, the major market indexes have seen steep sell-offs followed by equally sharp relief rallies. Many of these “peaks and valleys” have occurred in consecutive fashion (one day up, the next day down). In fact, during a two-week stretch in late October, the Dow saw triple digit moves in six out of ten trading days. Amazing! Needless-to-say, this is not an environment for the faint of heart. Nor is it an environment in which participation should be excessive. The Appleton Group LLC is in the business of producing positive returns over time with as much consistency as possible. Our clients expect no less, and while it is our goal to exceed expectations at all times, the market can and will be uncooperative from time to time. The markets have risen while we’ve maintained large cash positions, leaving portfolio performance a bit behind. Given the market’s current posture for the year, we really haven’t missed out on much, and our portfolio history has demonstrated an ability to “catch up” should the market advance continue. Crystal ball or no, being on the wrong side of the market for too long (either missing out on opportunities or experiencing significant losses) can create undue stress. As we will inevitably be on the wrong side of the market from time to time, it is our goal to keep such occurrences to a minimum, and to keep the duration of these occurrences as short as possible.
The Economy
The recent decline in energy prices will begin to show more favorable inflation data. As of yet, there is no real evidence to suggest that higher energy prices are having a significant effect on producer prices, as the annualized rate currently stands at a very modest +0.80%. As energy prices have subsided over the past several weeks (crude now stands at around $58 per barrel, natural gas has receded from $14 per million BTU to around $10, and unleaded gas has dropped from $3.00 to around $2.21). This data will show up in coming months, but has already been factored into stock prices.
It is likely that the softening of energy prices will help set the stage for a healthy holiday retail shopping season. In fact, consumer sentiment has already shown marked improvement, and is likely to translate into higher sales for retailers heading into the Thanksgiving weekend. Early sales tallies will be available at the end of this month.
