Strong earnings and further evidence of a soft landing in the economy sent the market higher this week:
Dow ................ 11,961 +0.9%
Nasdaq ............. 2,357 +2.5%
Nasdaq 100 ......... 1,727 +2.5%
S&P 500 ............ 1,366 +1.2%
S&P Midcap 400 ..... 785 +2.8%
S&P Smallcap 600 ... 389 +3.2%
Optimism returned to the market on Monday, despite news of North Korea's nuclear weapon test. Google (GOOG) created excitement with a video content deal with Warner Music Group (WMG) and later the much-covered deal to acquire YouTube for $1.65 billion. That lit a fire under technology.
Financials also continued their recent strong performances. The sectorlooks set to boost S&P 500 earnings on business fundamentals and with a further helping hand from the end of Fed rate tightening.
Oil prices took a ride, first up on reports that OPEC would cut production, and then down on follow-up reports that OPEC President Daukuru saw no need for an emergency meeting.
The Dow gained 0.1% and the Nasdaq gained 0.5%.
Tuesday brought another all-time high on the Dow as oil prices fell anew, this time to the tune of -2.4% to less than $59 per barrel. Yet, rumors of the yet-to-materialize OPEC production cut were enough to float optimism in the oil patch.
The Dow rose 0.1% and the Nasdaq 0.2%.
Wednesday extended Tuesday's oil price shrinkage by another 1.5% to a new low at about $57.50 per barrel. Hope of help from OPEC failed to maintain any cheer from the day before. Instead, fear ruled the energy sector and spread throughout the market as traders worried that reduced earnings from the energy engine might squash large caps as a group.
Oil is at an inflection point with traders jockeying for position on either an imminent price breakdown or the building of a base ahead of long-term factors pointing to sustained or higher prices.
As ever, oil prices bear watching as a major factor in whether inflation affects Fed policy on interest rates and the economic soft landing story. We may be able to hit the sweet spot with oil high enough to keep earnings coming strong from the energy sector, but low enough to allow the economy to muscle through a slight slowdown. So far, so good.
The FOMC minutes predicted that the economy would continue to moderate in the second half of this year. We've known that for a while. In fact, Idiscussed that in this space way back in January. The reason it's still news is that it increases the odds of the Fed keeping rates steady.
Good news to be sure, but it was trumped by recent statements from Fed officials who've sounded worried still about inflation. Bond traders haven't liked the sound of that, so they've sold off Treasuries and market interest rates have risen.
Rising interest rates from any source are not good for the financial sector because they raise the cost of borrowing. In the wake of that news, Legg Mason (LM) warned that fiscal Q2 earnings won't meet expectations. Then, a trifecta of bad news for the financial sector was completed when Bank of America (BAC) received a downgrade from Bernstein.
This stew put off enough of an odor to keep the markets slightly down for the day.
The Dow lost 0.1% and the Nasdaq 0.3%.
Do not despair, however. As the theme song of Annie predicts, the sun did indeed come out tomorrow.
Thursday was blessed with an improved earnings outlook and evidence of the economy settling into the soft landing the Fed wants.
Costco (COST) beat expectations and forecasted 15-19% earnings growth in fiscal 2007. That sent its stock up 8%. Then PepsiCo (PEP) reported a more than 70% gain in earnings, giving hope that the S&P 500 would post a 13th quarter of double-digit profit expansion.
Technology continued its recent outperformance as investors picked up on the improving growth outlook. Windows Vista is looking ever closer. Intel's new chips are getting rave reviews and are penetrating the market
Pushing the Dow higher was McDonald's (MCD), which gained 3% to a multi-year high on news of higher-than-forecasted September same-store sales.
Finally, the Fed's Beige Book gave a thumbs-up on the economy. Despite a slowing housing market, the report found that manufacturing activity is basically healthy in most districts, wage growth is modest and not pushing prices unduly higher, and that in general there are few signs of upward pricing pressure.
The Dow gained 0.8% and the Nasdaq surged 1.6%.
The market rested a bit on Friday when General Electric (GE) merely matched earnings expectations. That's not bad, but its not the stuff that parties are made of.
Then the Commerce Dept. revealed that September retail sales fell 0.4% against expectations. Sales excluding autos fell even farther, 0.5% to their lowest level in three years. Word went out that the consumer is dead and the red flags of a not-so-soft landing were being prepared for unfurling when some guy with a calculator mentioned that the drop in sales was mostly due to an eye-popping 9.3% collapse in the price of gasoline, which is good for the economy. The red flags went back in their sleeves, but the crowd remained unenthused.
The Dow gained 0.1% and the Nasdaq 0.5%.