Bull vs. Bear – Point; Counterpoint

Weekly Update – September 10, 2012

The major indices closed out last week in positive territory despite a disappointing jobs report as investors’ disappointment vied with renewed hope that the Fed could take action as early as next week’s FOMC meeting. The S&P gained 2.23%, the Dow gained 1.13%, and the Nasdaq closed up 2.26%.[i]


In light of the sustained rally, we want to discuss some of the forces at work right now and take a look at both the bull and the bear case for coming weeks.


Headwinds could trigger a market decline:


The market run-up puts the S&P trading at 13.3 times forward earnings estimates, meaning that investors are paying just over $13 for each dollar of expected corporate earnings. Given the insipid corporate performance of the second quarter, and reduced expectations for the year, most analysts don’t believe that markets will move significantly higher.[ii] Weak economic fundamentals may be a drag on market movements as we get closer to the end of the year. Last week’s disappointing jobs report underscored just how far the economy still has to go before it can be considered healthy. Although the overall unemployment rate fell to 8.1%, that decline can be largely ascribed to discouraged Americans dropping out of the job search.[iii]

Chronic troubles in Europe and Asia may continue to dominate headlines and provoke concern among investors about possible contagion. National elections in the Netherlands and a German ruling on the legality of Europe’s major bailout fund could severely hamper efforts to knit Eurozone countries more closely together. Domestically, presidential elections have often produced a great deal of uncertainty in markets. With January’s fiscal cliff looming, investors will look to politicians to provide leadership, potentially creating market turbulence as the parties duke it out.


Tailwinds could push equities higher:


There are important events coming down the pike that could lengthen the rally such as additional quantitative easing by the Federal Reserve. This is the big payoff traders have been waiting for all summer, and one of the major factors in the rally. Quantitative easing is getting so much attention because monetary policy is pretty much the only game in town for improving the economy right now, given the political impasse in Congress.[iv] It’s hard to know when the Fed will implement further easing, although many expect it to happen this year.


Activity by foreign central banks in Europe and Asia could also give stocks a bump. Last week’s bond-buying announcement by the European Central Bank did a great deal to reassure investors that Eurozone bankers and politicians have the backbone to push through much-needed changes to fiscal and monetary policy. The plan is Europe’s most ambitious yet and will be able to buy unlimited amounts of government bonds to stabilize the debt of struggling countries.[v]


In short, there are a great number of conflicting factors at play right now that could push equities higher or pull markets down. Regardless of how things move, we are committed to keeping you informed and to guiding you as you make investment decisions.



Tuesday: International Trade

Wednesday: Import and Export Prices, EIA Petroleum Status Report

Thursday: Jobless Claims, Producer Price Index, FOMC Meeting Announcement, FOMC Forecasts, Treasury Budget, Chairman Press Conference

Friday: Consumer Price Index, Retail Sales, Industrial Production, Consumer Sentiment, Business Inventories


Data as of   9/7/2012


Since   1/1/2012




Standard & Poor’s 500























10-year Treasury Note (Yield Only)






Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized.
Sources: Yahoo! Finance, MSCI Barra. Past performance is no guarantee of future results.
Indices are unmanaged and cannot be invested into directly. N/A means not available.


U.S. worker productivity grew in second quarter. Despite slower hiring, companies were able to get more from their workers this spring. Productivity, measured as the amount of output per hour, grew 2.2%, beating the consensus estimate of 1.6%. While this may have a positive effect on corporate earnings, it may mean companies will need to hire fewer workers.[vi]

U.S. economy loses global competitiveness. According to a recent World Economic Forum report, the U.S. economy has become less competitive, slipping two places to become the world’s 7th most-competitive economy, just behind Germany and the Netherlands. Economists cited concerns over fiscal health and macroeconomic stability as reasons for the decline.[vii]

China urges greater economic cooperation. While announcing a new government infrastructure fund designed to boost internal spending, Chinese president Hu Jintao expressed concern over the slowing global economy and urged greater cooperation between Asian-Pacific countries. Such an announcement could presage a move to coordinate further monetary policy easing.[viii]

Silver lining: Small businesses added 99,000 new jobs in August. Despite an overall disappointing jobs report, many sectors showed improvement in August. Small and medium-sized businesses added a combined total of 185,000 new jobs in August, compared with 16,000 jobs added by large companies. The service and construction sectors also added significant jobs, indicating that some areas of the economy are doing well.[ix]


“It’s not the will to win that matters—everyone has that. It’s the will to prepare to win that matters.” – Paul “Bear” Bryant

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