The New Year Should Be Interesting!

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Clearly 2011 has a lot of intrigue to offer as we enter into this New Year. Market analysts and economists are certainly not short of opinions as to whether economic growth will simply limp along, accelerate, or for that matter slip back under the weight of continued high unemployment and a dismal housing outlook. Additionally, the jury seems pretty well split as to whether the Federal Reserve Boards follow through on quantitative easing, part 2, benefits or hinders the recovery.

If we were to rely on stock market performance for 2010 as a guide there would appear to be a significant amount of momentum heading into the year. Performance in the past year reflected the Dow Jones Industrial Average up 11.02%, the Nasdaq Composite up 16.91%, and the S&P 500 a positive 12.78%. The momentum implied stems from the fact that these total year performance statistics for the major indexes reflect gains for the fourth quarter alone of 7.32% in the Dow, 12.02% in the Nasdaq, and 10.2% in the S&P 500. To break down that momentum issue even one step further, the bulk of the fourth quarter gains were realized in the month of December!

However, it is easy to build a case that there is still a significant disconnect between Main Street and Wall Street and can that market momentum really continue? For example, while November retail sales were quite upbeat, that led to the expectation that total holiday season retail activity would be exceedingly robust. Against those forecasts, more retailers actually reported shortfalls than upside surprises for December suggesting that November sales reflected a pull forward from December due to excessive promotion and discounting. This forced buyers to be more discriminating in December. Certainly this holiday season had sales revenue exceeding the previous year to the delight of retailers, but short of the euphoria that had been suggested. Should consumer purchasing continue to be slow, profit eroding discounts may be needed to move out any excess inventory.

To be sure, the housing market remains an anchor on the pace of the recovery. A notable event in the first few days of the New Year was the fact that the Massachusetts Supreme Court invalidated two foreclosures by Wells Fargo and U.S. Bancorp because the banks lacked the documents to prove they owned the mortgages. This once again raises the concern of previous accusations that major banks were mishandling documents to speed up processing. While the contemplation of someone, or a family, being foreclosed on in their home is indeed an ominous thought, the fact remains that there is a huge inventory of housing in this category that needs to be worked through which will eventually help to stimulate the housing market. This court action may slow down that process. Unfortunately, the subprime mortgage crisis of 2008- 09 has yet to completely wring itself out of the system

Other headline risk when considering whether stock market momentum is sustainable concerns matters of the extent of the crisis in European sovereign debt and banking and how that continues to unfold. In addition, global markets will carefully watch to see how China struggles with maintaining the delicate balance of slowing inflation by restraining its economic growth. These issues will magnify the interconnectivity of the global markets.

Domestically the major question will be is our economy capable of growing without continued stimulus? The follow up questions are logically how long can the government continue attempting to stimulate the economy and what will happen when it does stop? The ultimate answer to those questions will most likely be influenced by the 112th Congress that was seated on January 6 with its new Republican majority in the House of Representatives and their larger representation in the Senate. The consequence of this new political facelift is expected to offer up a host of austerity measures, a.k.a. reductions in federal spending. Somehow the action behind the words stimulus and austerity seem to be counter to each other. So therein lies an immediate disconnect which only time will tell what the impact may be on the stock market.

So now we are beyond what certainly appeared to be a Santa Claus rally in December and into the period of the various January myths that are supposed to foretell how the market will end the year. One is that if market performance is positive after the first week, then it will end up for the year. Since this writing is after that first week and the market was indeed up we can all rest easy, right... it will be an up year. We just feel obligated to say though that it doesn’t represent a guarantee from us! It might help to wait, though, for the Super Bowl Stock Market Predictor! Remember, that forecasting tool says that if a team from the old NFL wins, the market will rise in that year. If a team from the old AFL wins, the market will fall. So just have patience now and by February 6, Super Bowl Sunday, we may have a handle on this stock market for 2011 after all!

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