Business News

Testing the Wall Street rally

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by Peter Switzer

Wall Street continues to struggle with gravity with the Dow Jones having trouble with the psychologically resistant 10,000-level. This week will be another important test for the rally with more company results ahead.

And some company reporting action locally starts to hot up with the likes of NAB, ANZ and Macquarie giving us their latest corporate profits.

In the US, companies such as Motorola, E*Trade, Kellogg's and Exxon Mobil give us another glimpse into the health of corporate America and the strength of the US economic recovery.

Pullback ahead?

Right now, we are starting to see talk of buyer fatigue on Wall Street and Craig James made an interesting point that suggests a pullback could be on the cards — but nothing dramatic.

“Our new team of resource analysts believe the medium-term outlook for the resource giants, BHP Billiton and Rio Tinto, is extremely positive,” James wrote late last week.

This is what these resource experts said: “In the long term, the continued economic development of China coupled with a broader global economic recovery from the GFC will see strong demand growth for commodities.”

But in earlier months, their view was slightly different: “In the short term, however, there is a significant chance of a correction in over-exuberant commodity markets that have been driven by restocking activity in China. A correction in base metal prices is likely to flow through to equities,” the resource analysts concluded.

Test of wills

The willingness of investors to keep on buying shares right now is being tested. Last Friday on Wall Street, even after Microsoft and Amazon reported healthy numbers, which you would have expected to spark a rally, the share indexes still fell.

For the week the Dow, the Nasdaq and S&P 500 were all down less than one per cent. There’s no great desire to dump stocks but there’s no rush to buy despite nearly 80 per cent of the 155 US companies that have reported so far beat earnings expectations.

Main game

I think the economy will become the main game again. Right now, lots of economic forecasters are saying growth will drop back from the three per cent or so region to around two per cent as the US government stimulus measures are phased out. And remember, a stock market works on what might happen in six or nine months time.

That means if the economic data starts to surprise on the high side then the market will take off again.

On Friday, US existing-home sales for September kicked up 9.4 per cent and this was the best level in over two years easily beating economists’ expectations. However, there is a stimulus effect in these numbers too and that makes them less market moving.

The week ahead

This week the big US numbers will be durable goods orders, consumer confidence, new home sales, GDP and personal income. This could give a good snapshot of how the US economy is recovering.

Locally, the big number is inflation out on Wednesday. This could be critical to whether we get an interest rate rise on Cup day and it could also determine its size — 0.25 per cent or 0.5 per cent!

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: Monday, October 26, 2009