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Can we trust US optimism?

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by Peter Switzer

With the Australian stock market set to go higher today on the back of Wall Street putting in a very positive day on the New York Stock Exchange, the question has to be — can we trust this new-found American optimism?

For numbers types, the Dow put on over 1.1 per cent and the S&P 500 was up a tick over one per cent, though the markets did finish off their daily highs.

So what happened to the fears over the mortgage market mess? What happened to concerns over a rise in Chinese interest rates?

Companies report

Bank of America did lose 0.42 per cent but Wells Fargo was up 4.28 per cent after a strong company report overnight. In fact, among the companies that reported in the trading day, Boeing beat expectations and the airline sector was flying high, which has to be a positive indicator that the US economy is turning. In fact, the big airline stocks were up between seven to 12 per cent today, with Delta Airlines up 10.85 per cent after forecasting its third consecutive profitable quarter.

This is big news for a troubled sector, which nosedived dramatically during the GFC.

Also commodity stocks had solid day with BHP Billiton up 3.32 per cent, which will carry over to the stock here today.

Modest growth

Adding to the good vibes was a more encouraging Beige Book, which is produced by the Federal Reserve every six weeks to snapshot the economy. The latest reading says seven out of the 12 regions surveyed are growing at a modest pace. More importantly the Fed observed that it was seeing encouraging signs in manufacturing, consumer spending and car sales. This has led to the conclusion that the overall economy has also expanded, albeit at a pace, which is pretty sedate, however, it’s a long way from the double dip recession that many were predicting for the past six months.

Oil prices increased $US2.28 to $US81.77 after oil inventories in the US increased by less than expected. That’s often seen as a bullish sign for the economy.

Positive/negative equation

For those trying to create the equation that tells you to be negative or positive it looks like: company earnings + moderate economic growth + expected QE2 + the typical mid-term election bounce is greater than the pessimism associated with the mortgage market mess. As the Yanks might say: “I’m rooting for America".

What’s ahead

For forward thinkers, there’s a big reporting day tomorrow with the likes of McDonald’s, Caterpillar and American Express reporting.

Finally, the expected good day on the local market should shine the spotlight on Ten’s company reporting figures today and if they’re better than expected, James Packer will be pretty happy with himself along with anyone who piled into the stock yesterday, which rose close to 10 per cent in a day!

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For advice you can trust, contact Switzer Financial Services.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Thursday, October 21, 2010