March 21st, 2012 9:34 AM by Mel Samick
In addition to the Dow recently exceeding 13,000, a level not seen since May of 2008, the S&P 500 also broke through the 1,400 threshold. During the depths of the global financial crises three years ago, the Dow declined to a low point of 6,440. Since then, we've seen an average annual GDP growth of approximately 2.5 percent (ranging from -6.7 to +3.9 in different quarters), we've seen government debt grow 1.5 times and the unemployment rate decreased to 8.3 percent after touching double digits briefly. Should we believe that the equity markets are reasonably priced at this point?
The FOMC met this past week and issued a statement that the condition of the economy is stable, while soft spots in the forms of continuing high unemployment, a depressed housing market and fragile growth remain a concern. The Committee decided to keep rates at the extraordinary low level of 0-0.25% at this time while a majority of the committee members agreed that economic conditions will likely warrant an extension of that level of rates possibly as far as late 2014.
The new U.S. Jobless Claims reported last week fell to a seasonally adjusted 351,000, setting a 4-year record low, giving hope that economic growth will ultimately, and once again, become self-sustaining.
Mixed readings on business activities support cautious positive outlook. January Business Inventories were reported on Tuesday at 0.7 percent growth, above an expected 0.5 percent. However, the ratio of stock-to-sales remained unchanged since sales grew at the same pace. Last Thursday, the March Empire State Manufacturing Survey and Philadelphia Fed Survey composite business condition measures improved, while both reports point to the weakness in orders which may be a leading indicator of future slowness in manufacturing activity. The Industrial Production report for February disappointed, demonstrating no growth after a revised positive 0.4 percent in January.
Rising oil prices once again were considered a threat to unstable economic growth worldwide. The U.S. and Britain are reportedly in talks, and even in agreement, on the release of strategic oil reserves in an effort to prevent a further slowdown. There was more economic news on prices this past week: import and export prices went up, growing moderately at 0.4 percent, within the consensus range in February, partially offset by the downward revisions of the previous months' readings. Producer Price Inflation jumped in February to 0.4 percent, up from a prior level of 0.1 percent, but still below analysts' expectations. The Consumer Price Index released a day later, was exactly in line with producer's prices. Not surprisingly, consumers' inflationary expectations rose and Consumer Confidence fell in March, as reported this past Friday. Retail sales for February, nevertheless, posted nice gains of 1.1 percent after a January growth of only 0.6 percent revised.
During the past week, the results of the Fed's new stress test of the 19 biggest banks became public, earlier than expected, shortly after Chase announced their passage reportedly 2 days before the scheduled official release of results. The announcement reportedly had Citi admit that they almost passed, but in fact, failed the test. The results of the tests are considered positive as the majority of the tested institutions demonstrated sufficient capitalization and that is undoubtedly great news for the financial system, markets and taxpayers alike.
Information provided by NYCB Capital Markets