NEW YORK: Wall Street kicks off a new month and quarter Monday after a surprisingly strong series of gains in recent weeks, but with conflicting signals about the economy from the stock and bond markets.
The US stock indexes ended Friday with a robust performance for the week, the month of September and the third quarter, confounding many analysts looking for a more defensive posture in light of slowing economic conditions.
In the week to Friday, the Dow Jones Industrial Average climbed 1.5% to 11,679.07 after the blue-chip index flirted with its all-time highs hit in January 2000.
The Dow was up 2.6% for the traditionally weak month of September and 4.7% for the quarter, the best third-quarter performance since 1995.
The broad-market Standard and Poor's 500 advanced 1.6% on the week to 1,335.85. It was up 2.6% for the month and 5.2% for the quarter.
The Nasdaq composite increased 1.8% for the week to 2,258.43. The tech-heavy index climbed 3.4% for the month and nearly 4% for the quarter.
“The stock market has continued its impressive rally,” said Dick Green at Briefing.com, adding that the turning point was a signal from Federal Reserve chairman Ben Bernanke in July that the cycle of interest-rate hikes was coming to an end.
“This improved rate outlook is coupled with a continued good outlook on the other basic fundamental factor – earnings. Economic growth is clearly slowing, but the earnings parade keeps going.”
However, analysts say financial markets are sending mixed signals: the stock market sees a positive picture by lifting the Dow to near-record territory while the bond market has been flashing signals of a possible recession.
Robert Brusca at FAO Economics said the inversion of the yield curve – with rates for short-term bonds topping those for longer-term maturities – “has given off reliable signals for recession and more reliable signals for economic slowing.”
“Stocks and bonds appear to be looking at two very different economies these days,” said Douglas Porter, deputy chief economist at BMO Nesbitt Burns.
“Bonds are priced for a significant US economic slowdown, but stocks just aren't seeing it that way.”
But Porter noted that “one possible explanation for these seemingly divergent views is that the common factor is a downgrading of the inflation outlook in recent weeks, a potential plus for both markets.”
The “disconnect” between the two views “would suggest that financial markets are not assuming the worst for the US economy, and are instead priced for a more benign moderation in growth and, more importantly, cooling inflation pressures. The primary risk to this soft landing scenario would be a sudden snap-back in energy prices.”
In the coming week, investors turn their attention to economic reports on construction spending, manufacturing and later on monthly payrolls.
“We will see the market switch its focus to third quarter earnings reports and the outlook for the fourth quarter and 2007,” said Fred Dickson at DA Davidson.
“If gas (petrol) prices remain low or drop further, the consumer will probably go into the season feeling more optimistic, which could be a good sign for retailers,” Dickson added.
Bonds slipped in the past week after their recent strong rally. The yield on the 10-year Treasury bond increased to 4.633% from 4.597% a week earlier, while that on the 30-year bond rose to 4.767% against 4.738%.
Bond yields and prices move in opposite directions. – AFP