Friends
I hope everyone had a very nice Thanksgiving. Today marks the end of the month of November, so I thought I would pass on our thoughts for the month just ended, and take a look at what lies ahead of us. Stocks are ending the month virtually unchanged as measured by the S&P 500, and the DJIA is ending slightly down for the month. The real dynamics in price occurred in the municipal bond market. On the short end of the curve, we saw prices drop by 1% to 2%. Municipal bonds and bond funds with longer maturities (more than 10 years) saw prices drop by as much as 5% in many cases. These are significant moves for bonds and not totally unexpected (especially if you have been paying attention to me babbling on about the risk in bonds). Remember, bonds have had a remarkable move to the upside this year and they had become vulnerable to price movement. In our year-end investment outlook, we will discuss in more detail the reasons for various moves in bonds that we have seen.
I know that it is very popular to be negative these days, but on the domestic front, things are getting better, whether the media focuses on it or not. The PMI (purchasing managers index) number this morning was better than expected and one of the better numbers we have seen in quite some time. We also got a better than expected consumer confidence number this morning. It will be interesting to see if we get a decent employment number on Friday. That’s the improving domestic story. Offsetting that is the continuing problematic story in Europe. If Greece was their Bear Stearns, is Spain going to be their Lehman Brothers? The “contagion” story in Europe continues to strengthen the dollar and weaken the Euro. Of course, we know that when the dollar strengthens it puts pressure on stocks, and that is what we have seen over the past few weeks. Gold continues to buck all trends and seems to work under any scenario. Oil has climbed back into mid $80’s and seems destined to climb higher.
As the year ends, will the improving domestic story outweigh the European debt mess, or vice versa? If the Euro story fades and the dollar begins a new decline, look for stocks to enjoy a nice Santa Claus rally. Technically, we closed right at the 1180 level on the S&P 500, which we have been using as our support level in the 1180 to 1200 trading range (the Dow closed just above 11000 by the way). The S&P 1173 is the critical support that we will keep an eye on in the coming weeks. If these support levels hold, we could trade higher into year-end. On the other hand, if the news out of Europe dominates the news cycle, then stocks will be challenged in the months ahead. Nevertheless, we are encouraged by the increasingly improving domestic news.
We’ll check in with you on Friday after the employment number is released. Until then, have a nice week everyone.
