Economic data showing a soft landing gave hope that the Fed is finished, and sent the market higher this week:
Dow ................ 11,561 +1.5%
Nasdaq ............. 2,236 +3.2%
Nasdaq 100 ......... 1,632 +3.6%
S&P 500 ............ 1,320 +1.6%
S&P Midcap 400 ..... 752 +1.8%
S&P Smallcap 600 ... 374 +2.8%
Monday saw oil prices fall for the sixth day in a row, something we haven't seen in three years. Gold plunged to its June levels below $600 an ounce. The general pullback in commodities recently has served to ease inflation fears, which in turn eases fears of further Fed rate hikes.
The other part of easing inflation is a slowdown in economic activity, which brings its own risks. What investors want is the economy to slow just enough to let inflation drain a little, but not so much that it stagnates. That's the Fed's soft landing scenario.
So, when St. Louis Fed President Bill Poole said that the economy is not fragile but robust, people took heart.
The Dow ended the day flat while the Nasdaq tacked on 0.3%.
Tuesday saw oil prices drop yet again, this time -2.8% to less than $64 per barrel, the same price paid last March. The industry is forecasting lower demand and we've recently had news of increasing supply from both Prudhoe Bay, the Gulf of Mexico, and other regions.
Goldman Sachs (GS) beat analysts' estimates and announced a 60-million-share buyback, which amounts to 15% of its outstanding stock.
The technology sector was boosted by an analyst upgrade on Advanced Micro Devices (AMD), new product announcements from Apple (AAPL), and the sense that Hewlett-Packard (HPQ) is putting its recent boardroom scandal behind it now that CEO Mark Hurd will succeed Patricia Dunn as chairman.
The Dow gained 0.9% and the Nasdaq gained 2%.
Wednesday extended the appeal of stocks that we've seen since the end of July. A sense that all is well was enough to overcome a slight rebound in the price of oil.
Lehman Brothers (LEH) followed on Goldman's heels by beating estimates and saying that its pipeline of new deals is at record levels.
Investors took advantage of beaten-down prices in the oil sector to pick up shares. The energy sector rose 1.7%, led by drillers (+3.1%) and explorers (+2.4%).
The Dow gained 0.4% and the Nasdaq gained 0.5%.
Thursday morning brought the retail sales report for August. They unexpectedly rose 0.2% in the wake of a 1.4% rise in July. Sales are up 6.7% year-over-year, up from 4.8% in July. Economists had expected a decline of 0.2% in August, so the news was good. It showed that consumers are alive and well, and that perhaps the death of the economy was widely overstated.
Also, jobless claims fell 5,000 to a seven-week low of 308,000. Such steady labor conditions provided further reassurance that the economy's doing fine.
There was a whisper of concern over another drop in oil prices, this time -1.2% to $63.38 a barrel. Natural gas futures dropped a whopping 10% to two-year lows. While these readings are good for the economy, they will crimp the earnings of energy companies, which have been driving the double-digit earnings of the overall S&P 500.
The Dow lost 0.1% but the Nasdaq gained 0.1%.
Friday brought the much-anticipated August consumer price index report. It came in at 0.2% in both the overall CPI and the core CPI, which removes volatile food and energy costs. That was slightly below expectations of 0.3% for the overall and in-line with expectations for the core. A tame reading was just what the Fed and the market wanted, and it's what they got. It cooled inflation fears and lowered the chances of another interest rate increase.
Kansas City Fed President Thomas Hoenig told the annual convention of the Independent Bankers of Colorado that the CPI data for August was good news. He said the economy is still doing well, but that the rate of growth was slowing to less than the long-term trend.
Technology did well when Adobe (ADBE) beat estimates and gained 10%, and Microsoft (MSFT) went 2% higher on the announcement of its new Zune to rival Apple's iPod.
Ford (F) fell 12% when it announced that as part of its Way Forward restructuring plan it would stop paying a dividend, and that its North American unit will not see a profit until 2009. Merrill Lynch promptly downgraded the stock.
The Dow and the Nasdaq each gained 0.3%.
Where to next?
Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business, says that Friday’s data will “ignite investor confidence.” He predicts that, “Portfolio investment will shift to stocks and conditions are ripe for a long-awaited bull run on Wall Street.”
Charles Kirk of The Kirk Report writes, “With the good news coming out at every turn, you can rest assured the bullish animal spirits will be in full gear next week.”
On the other hand, Tim Wood of Cycles News & Views, who accurately called both the May top and the July bottom, writes, “I no longer trust this advance. . . . This is a time for caution and skepticism rather than complacency.”