A Perfect Week

By David B. Armstrong, CFA | Jul 05, 2011 | Weekly Market Commentary

A stronger than expected ISM Manufacturing report boosted stocks on Friday and ensured that equity markets posted gains for five days in a row.  In fact, it was the best weekly performance for the Dow Jones Industrial Average since 2009.

The market seemed ready for a big week of buying after seven out of the last eight weeks posted losses and we saw stocks skid over 7%. With most people believing that it was just a soft patch, it seems the news finally stopped seeming so bad that people decided to buy. Of course, for those who rode it out (congratulations for having the correct mindset and being an investor rather than a trader), this will prove to be yet another blip on a long-term chart.

All of the equity markets we track were winners last week.  The Dow Jones Industrial Average (DJIA) gained 5.43% to finish at 12,583, the S&P 500 Index gained 5.62% to finish at 1,340 and the Nasdaq Composite Index gained 6.15% to finish at 2,816. The Russell 2000 index, which tracks the performance of small capitalization stocks, gained 5.3% to finish at 840.

Here are some thoughts that may help explain the change in sentiment last week. It seems likely that the impact from the disaster in Japan will continue to wane; oil is down about 17% from its recent 2011 high, which helps inflation;, corn prices are lower (that helps food prices and inflation); and it doesn’t look like the Fed is going to be raising interest rates anytime soon, especially with low inflation. Finally, the June ISM Manufacturing report can be viewed as a gauge as to whether the economy is moving forward or backwards.  Any reading above 50 means the economy is moving forward.  June’s reading actually moved up from 53.5 in May to 55.3 from May, which is a 1.4% move over the past month – which indicates that it’s not just moving forward but actually speeding up a bit. That’s a decent sign.

As for inflation, well, we have always maintained that it simply cannot get out of hand until we see wage growth.  That seems a long way off given the unemployment picture which continues to hover above 9%.

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**Standard Compliance Disclosures
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.  All performance referenced is historical and is no guarantee of future results.  All indices are unmanaged and cannot be invested into directly.  Stock investing involves risk including loss of principal.  The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries, and widely held by individuals and institutional investors. The Standard & Poor’s 500 Stock Index (S&P 500) is an unmanaged capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The NASDAQ Composite Index measures all domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index. The Russell 2000 Small Stock Index is an unmanaged index generally representative of the 2000 smallest companies in the Russell 3000 Index.  The Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values.