What a Week: Minor Tremors
Liz Rappaport
11/10/06 - 05:39 PM EST
The Democratic wins in the midterm election this week washed over Wall Street markets like a gentle wave rather than the tsunami felt in Washington. The real $64 trillion question is not what the election means for stocks, but when is this market going to correct already?
The
Dow Jones Industrial Average has gone over 900 days without a 10% correction -- the fourth longest stretch in its history. The May market downturn sent the major averages down no more than 7% before a rebound commenced. This week, the Dow hit new all-time intraday and closing highs and finished up 1% for the week to 12,106.35 after a very modest rally Friday. The
S&P 500 finished the day up 0.2%, and 1.2% on the week, to close at 1380.77. The
Nasdaq Composite rose 0.6% Friday to 2389.72, up 2.5% on the week, led by big gains in
Cisco Systems (CSCO Quote).
With bullish sentiment still running high, angst about when and how a "real" correction might happen has returned to the market.
The turning point could come next week as investors await several economic data points to see if they'll confirm the slew of weaker-than-expected data that streamed in last week, says Peter Boockvar, chief market strategist at Miller Tabak. With retail sales figures, inflation data and the first industrial data points for November out next week, the bears are looking for the soft landing to slip away. Meanwhile, the bulls are hoping for upside surprises, the way the payrolls revisions revitalized the market last Friday.
The major averages had a strong start this week with a boost from a slew of M&A and private equity deals, including private-equity buyouts of
Four Seasons Hotels(FS Quote) and
OSI Restaurants (OSI Quote). But the market floundered through the remaining days with barely any economic data and a yawn-inducing election in terms of implications for companies, save the pharmaceuticals.
Stock investors had priced in Democratic control of the House of Representatives, but they hadn't expected the Senate to change hands as well. When it did Thursday, selling activity picked up, particularly in pharmaceutical and health care stocks.
The pharmaceutical sector fared poorly this week, as investors heeded lawmakers' warnings that the Democrats will revisit the high cost of prescription drugs for Medicare recipients. Shares of
Pfizer(PFE Quote),
Merck(MRK Quote) and
GlaxoSmithLline(GSK Quote) dropped between 2.5% and 4.4% on the week. The
Amex Pharmaceutical Index declined 2.6% this week.
Other sectors that might have been impacted by the change of control in Congress were largely untouched, as the notion of gridlock quelled investors' nerves. Indeed, the last major piece of legislation that meant much to the market was the tax cuts three years ago, and those are not an issue until at least 2008 as President Bush is unlikely to allow a repeal to pass his desk, if it were ever proposed.
"The one piece of unambiguously good news is that the election is over," writes Ethan Harris, chief economist at Lehman Brothers. No more negative campaigning or "cartoon-quality analysis," he writes.
The consumer came back into focus this week as the University of Michigan sentiment survey showed consumers scaled back their enthusiasm in November after it surged in September and October.
But Friday brought another view, as
Kohl's(KSS Quote) posted blowout earnings and increased its forecast for the year. The company's shares gained 1.03% on the day. The S&P Retail Index gained 0.98% on the day and 1.9% on the week.
Economists will be watching the inflation data next week watching for increases in the price of food, as the average consumer's savings on the price of gasoline could easily shift to the grocery store. The price of food commodities are hitting highs -- orange juice is at a 17-year high, corn and wheat are hitting 10-year highs and soybeans are the highest they've been in a year.
Inflation in the grocery story could further the notion of Fed rate hikes. This week brought more hawkish Fedspeak and concerns about a falling dollar as foreign central banks warned of diversifying out of U.S. dollar assets.
The bond market ended the week with yields reflecting the pessimistic view of the economy. The 10-year note yielded 4.59% Friday, while the 30-year note yielded 4.69%.
So, with the election out of the way, angst over the data comes roaring back. The bond market seems to run with the bad news, but stocks are likely to be choppy as investors sort out their bets on the fourth quarter and the holiday season.
