Investors Flourished Despite Many Conflicting Signals

Last week, for the second consecutive time, stock prices on global exchanges rose, thanks to investors’ belief that monetary and financial authorities will continue to stimulate economic recovery and that interest rates will remain at historically low levels for some time.

On Wall Street, the Dow Jones index rose 2.5 percent last week, reaching 10,270 points, the highest level in 13 months. The S&P 500 index strengthened by 2.3 percent to 1,093 points, while the Nasdaq index jumped 2.6 percent to 2,167 points. At the very beginning of last week, investors were encouraged by the promise from finance ministers and central bankers of the G20 group of the world’s most developed countries that they would continue to apply stimulus measures until economies are firmly on the path to recovery.

"Investors were afraid that, due to signs of recovery, authorities would start to withdraw stimulus measures, but after the latest comments, it seems that these measures will be applied longer than expected," says Michael Pento, a strategist at Delta Global Advisors. This means that interest rates in most countries will remain at historically low levels for some time. In addition to reducing financing and business costs for companies, cheap money encourages investors to take riskier investments, such as stocks, while withdrawing from investments that yield low returns, such as the US dollar.

As a result, the dollar weakened last week, with its index, which shows the value of the dollar against six major world currencies, diving to its lowest level in the last 15 months, well below 75 points. This spurred the rise in commodity and oil prices, with oil prices fluctuating between $77 and $80 per barrel, while the price of gold reached $1,120 per ounce, the highest level in history. Consequently, among the biggest winners last week were the stocks of oil and mining companies.

Record low interest rates and a weakening dollar were the main drivers of stock price growth in the first half of the week, while in the second half, the focus of investors was on the retail sector. Business reports from retail chains are currently extremely important, as are their sales forecasts for the fourth, holiday quarter, because economic recovery is not sustainable if consumer spending does not begin to recover.

Wal-Mart performed better than expected in the last quarter, but the largest US retail chain is cautious in its sales estimates for the fourth quarter. It expects its sales in the crucial quarter, when holiday spending usually rises sharply, in stores open for at least a year, to range from a 1 percent decline to a 1 percent increase. The management of JC Penney is much more optimistic, stating that the earnings of that retail chain in the holiday quarter could be higher than previously estimated.

Despite last week’s significant rise in stock prices, many investors remain cautious as they are not sure that the economic situation justifies the strong growth of stock indices, which have jumped about 60 percent since mid-March. While some analysts believe that stock prices have risen too much in recent days, given the economic situation, others say it is a good sign that leading indices are managing to hold onto gains, even though economic news is not particularly bright.

"It is encouraging that indices do not fall significantly after each major rise. The market is not as unstable as last month, when stock prices sharply declined after each major jump. This is a good signal for market consolidation, so I expect that prices could continue to gradually rise by the end of the year," says Ryan Detrick, a strategist at Schaeffer’s Investment Research. However, some analysts are not so optimistic.

"There are many conflicting signals, so it is unclear which will prevail. Will fresh capital enter the market, which would spur stock price growth by the end of the year, or will investors opt for profit-taking sales," says Michael Sheldon, a strategist at RDM Financial. How cautious investors are is shown by the thin trading volume on Wall Street. Last week, about one billion shares changed hands daily, while last year the daily average was 1.49 billion.

Stock prices also rose on European exchanges last week. The London FTSE index jumped 2.99 percent to 5,296 points, the highest level in 14 months. The Frankfurt DAX index strengthened by 3.60 percent to 5,686 points, while the Paris CAC gained 2.67 percent, reaching 3,806 points. However, on the Tokyo Stock Exchange, the Nikkei index fell 0.2 percent to 9,770 points, marking the third consecutive week of declining Japanese stock prices. (H)