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Stocks – up they go!

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by Peter Switzer

Wall Street laid a great platform for another great day at the office for local stocks with US company earnings driving investor enthusiasm. And this was enthusiasm with a capital E!

For those who have doubted this rally, the news overnight could lead to second thoughts about their views. What we’re seeing are good profits in an environment of low inflation, which suggests that the massive monetary expansion is at least achieving growth without worrying jumps in prices.

This looks like sustainable growth, which undoubtedly will help job creation and it comes in a week when housing news surprised in the positive. If Ben Bernanke, the Fed boss, has had trouble sleeping worrying about whether his QE2 was going to work, he’s probably got a good sleep ahead of him tonight.

The Dow Jones index surged 186.79 points to 12,453.54 and that’s best level since 5 June 2008.

The S&P 500 put on 1.35 per cent and the Nasdaq added 2.1 per cent to finish at 2802.51.

Earnings season

Another interesting driver of these good US profits results is the fact that a lot of the gains aren’t coming from the US! American companies are now more leveraged to the global economy and that has helped companies such as Intel, Apple and others produce great results despite the challenges in the States.

Overnight the company YUM which owns KFC and Pizza Hut saw US sales fall one per cent but China sales were up 13 per cent. That’s the new story from an increasingly different and more global US economy and it’s surprising analysts too.

The experts thought Intel would come up with earnings of 46 cents a share but the result was 59 cents and that’s a huge miscalculation.

On the US economy

Meanwhile, existing home sales were up 3.7 per cent and this was better than expected and mortgage applications also spiked higher.

Finally, CNBC had an interesting take on inflation from David Rosenberg who is chief economist and strategist at Gluskin Sheff. He makes the point that the US economy is much more a services economy than ever before and so oil at US$100 a barrel is not as bad as it would have been 30 years ago.

“Service sector inflation is now running at historical lows of little more than one per cent, and here we are about to enter the third year of a statistical economic recovery,” he said.

“Service sector inflation used to be sticky, because this area of the economy years ago was dominated by unions, was protected by entry barriers, and did not face much in the way of competitive pressures.”

But that’s all changed.

Rosenberg says there’s an 88 per cent correlation between wages and inflation. In the US, wages after productivity is taken into account are falling!

If inflation is less of a concern, it will help this rally but always remember that stock markets don’t rise in straight lines — a correction will happen — but that said, things are still on the up.

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.

Watch more from Peter on SWITZER TV.

Published on: Thursday, April 21, 2011

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