With the DOW above 12,000
With 4th Quarter 2010 GDP coming in at 3.5%, we now have 6 back-to-back quarters of positive GDP growth and with each successive quarter, market makers and industry insiders become increasingly confident; to the point that their confidence may finally be making its way to consumers. The Consumer Confidence Board recently reported a 7.3 point increase in consumer and 12 point improvement in CEO confidence for January. As these are the groups that control spending, investment and hiring, the upward shift is significant, especially in the midst of a cold, wet winter.
The market’s resurgence since it bottomed out at just above 6,500 in April 2009 has been built on this growth in confidence, a return to reason and a string of impressive quarterly earnings reports from publically held corporations. Some suggest that a continuation of strong corporate earnings is less likely in future quarters as unemployment continues to hover near 10%, and they’re right. Others point to the ease of showing growing earnings after a period of GDP declines, and they’re right. Yet others contend that the US consumer, having shifted from a net savings rate of less than 2% to one of nearly 7% makes it difficult for demand to maintain levels supportive of ongoing earnings growth, and they’re right. But each of these voices have been heard before, while the markets have continued to improve on the strength of increased earnings. The consumer confidence element is critical as it’s consumer spending that drives increases in revenues and motivates corporate investment. It’s also consumer participation in equity markets that can fuel additional stock market gains necessary to reach new market highs.
Some analysts and asset managers are now calling for the DOW to break 14,000 by the end of 2011. A lofty goal by any measure for a market that has already retraced it movement back to the 12,000 level, but doable if the right sequence of economic, political and market events materialize. Though it’s hard to see how such optimism can be maintained in the face of a $1.5 trillion deficit and the need to one day account for our excesses.
And that becomes the challenge; how to balance the reality of current and future debt levels with optimism for the future. It’s a challenge with which our domestic market is familiar and one that requires hope (however audacious it may be), optimism and clarity.
