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Wall Street heads north

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by Peter Switzer

What a difference a day makes, especially when the doomsday merchants are brought to book by hard data. And even the Yanks got into the better economic readings, with manufacturing continuing to defy the double dip pessimists, helping the S&P 500 index to rack up its best percentage move since 7 July.

The broad market index put on over 30 points to get to an important level of 1080 which could be the start of something positive if the Yanks can pull a better than expected jobs number on Friday. However, this could be a bigger call than the better than expected ISM manufacturing data which reinforced the great start on the New York Stock Exchange.

Australian influence

And get this, our strong economic data yesterday was seen as a help to traders on Wall Street.

For the first time ever, at least in my experience, a US business reporter has said that “strong economic reports from Australia and China” moved commodity stocks and that helped the market up.

Good week

Tomorrow, there will be retail sales which could help or hinder this nice up move but it will be the jobs report that could turn a great start to the worst month of all for shares — September — into another month of frustration for wealth builders.

This week the Yanks have, on the positive side, had good house prices news plus a good consumer confidence report and now a better than expected manufacturing report.

If you look at where the valuation of the S&P 500 on a trailing basis is right now, the index is under its historical trading range and even on a free cash basis for major companies, which Warren Buffett uses as a measure for assessing companies, this indicator is saying that shares are not over-valued.

It’s always hard to have a crash with undervalued shares!

What’s ahead?

My feeling is that the US avoids another recession and will experience slow economic growth and then slow stock prices’ growth until the balance sheet health of major companies results in jobs being created. This will power the US economy and then Wall Street taking all of us to the races.

On my program on Sky News Business Channel program, former ANZ chief economist Saul Eslake said investment-led recoveries are slow to spill over to jobs but eventually it happens.

We have an investment-led recovery in the US and that’s why they should avoid a double dip recession but it’s also why the stock market will have ups and downs until the doubting Thomases become ‘boom boom Bobbies’.

Economists like me often rely on models to work out what might happen in the real world. One of my favourite models was Rachel Hunter, who once said of a certain shampoo: “It won’t happen overnight, but it will happen”.

For advice you can trust, contact Switzer Financial Services.

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Published on: Thursday, September 02, 2010