Last week was a good one for Mitt Romney as he handily bested a subdued Obama in the first Presidential debate. The media couldn't even spin this one to the left as clearly Romney was on his game and may have given his chances a boost. He came across as very credible and extremely knowledgeable, a face he hadn't been able to show to the country previously. Meanwhile. Barack Obama looked tired, unprepared, and not very feisty. Both candidates played footloose with the facts as usual and they throw around the "billions of dollars" term like it is nothing. Personally, I was happy to see that plenty of domestic issues were put out front to debate though I'm disappointed that the "Fiscal Cliff" issue was barely even mentioned. The market rallied after the debate with a mini "Romney Rally," perhaps a sign of what would happen if Romney were to pull off an upset that is not baked into the market expectations. Then the Obama campaign got good news on Friday when the jobs report was better than expected with the unemployment report falling to 7.8%, the lowest level since Obama took office.
This week is the official start of 3rd quarter earnings with Alcoa reporting on Tuesday. Earnings numbers for the S&P 500 have come down and now analysts expect earnings to be down 4-5% for the quarter. Last quarter 65% of companies beat lowered expectations. The question is, have expectations been lowered enough that companies can generate positive surprises to lift the market higher? All eyes will be on forward guidance and any talk of 2013. However, visibility is so limited and there are so many uncertainties that 2013 talk will come with a lot of caveats I'm sure.
It's hard to get very bullish or bearish here and I find the AAII Investor Poll very interesting in that it is almost perfectly neutral with Bullish/Bearish/Neutral all at about 33% each. The positive remains that the central bankers are accommodative and investors still shouldn't "Fight the Fed." October is the month of corrections, including the crash of '87 and several mini pullbacks. I wouldn't be surprised to see a pullback but anything more than a 5% pullback would have to be accompanied by some really unexpected news in my opinion. With the Fed providing a backstop, there still is a lot of money from investors that missed the rally looking to get into the market.
The economic news last week was pretty much positive with the unemployment report stirring up the conspiracy theorists hornets nest. On Friday, it was reported that the unemployment rate fell to 7.8% from 8.1% prompting some to suggest that the numbers were fudged to help the Obama administration following the debate loss. Non-farm payrolls increased 114,000 in September, almost exactly the 115,000 the consensus expected. Revisions to July/August added 86,000, bringing the net gain to 200,000. Let's pick apart the numbers a bit. Civilian employment, an alternative measure of jobs that includes small-business start-ups, increased 873,000, the most in almost 10 years. As a result, the unemployment rate fell to 7.8% despite a 418,000 increase in the labor force. Private sector payrolls were up 104,000 in September versus a consensus expected 130,000. In other words, the sector that beat the consensus in September was the government. Also, the huge rise in civilian employment was goosed by part-timers, with a 322,000 overall gain and a 582,000 increase for those working part-time for economic reasons.
The ISM services index came in at 55.1, higher than the consensus expected in September, signaling a combination of some acceleration in that sector and an abatement of negative sentiment regarding Europe. This is the best reading on the index since March.
After three straight months below 50 - signaling contraction - the ISM manufacturing index came in above 50, easily beating consensus expectations for September. According to the Institute for Supply Management, a level of 51.5 is consistent with real GDP growth of 3%. For the third quarter as a whole, the ISM index averaged 50.3, which is consistent with a growth rate of 2.6%.
Global markets rallied last week fueled mostly by economic news and the Romney showing in the debate. The Dow closed up 1.3% to 13,610, a new 52-week high and only 4% below the all-time high of 14,164. The S&P 500 was up 1.4% to 1460.93 and is up over 16% YTD. The NASDAQ added .65% to 3136 but Apple had a tough week, losing 2%. European stocks rose Euro Stoxx 600 rising 2.1% for the week. There was strength across the board with Italy up 5.17% and Spain up 3.19% both reversing last week's losses. Asia/Pac stocks rose only .1% with Australia up 2.45% and Hong Kong up .83%
Have a great week!
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Bob Centrella, CFA, is President/Managing Partner of Forza Investment Advisory, LLC, a Registered Investment Advisor based in Westfield, NJ. More information on Bob and Forza Investment Advisory can be obtained from www.ForzaInvestment.com. You can call at 908-344-9790
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