The watchwords on Wall Street this week were "technology" and "volatility," which probably isn't coincidental. Amid an almost myopic focus on tech shares (a la 1999), major stock proxies whipped about this week, but major averages ended higher.
For the week, the
Dow Jones Industrial Average
rose 0.5%, the
gained 1.7% and the
Friday's session best embodied the week. Amid a smattering of mixed economic data -- consumer sentiment was higher than expected while industrial production/capacity utilization was lower -- traders appeared preoccupied with a disappointing fourth-quarter outlook from
, which fell 4%, a Merrill Lynch downgrade of
, off 2.7%, and revelations of a
Securities & Exchange Commission
, which closed down 15%.
Still, the overriding bullish sentiment and ability to brush off bad news -- most evident Thursday when the Nasdaq enjoyed its biggest rally of the week despite a gloomy outlook from
-- prevailed. After trading as low as 1386.14, the Comp ended down 0.1% to 1410.53.
Similarly, the Dow gained 0.4% to 8578.26 vs. its intraday low of 8460.77 and despite a 2.6% fall in
following a J.P. Morgan downgrade. The S&P 500 closed Friday up 0.6% to 909.72 after trading as low as 895.33.
Friday's intraday volatility aptly reflected the weekly action, although the session ran counter to the weekly trend of Nasdaq relative strength.
One rationale for the group's performance is that "after three years of having negative returns, the average portfolio manager can't afford to trail his/her benchmark this year," as Rick Bensignor, chief technical analyst at Morgan Stanley observed on Friday.
This performance anxiety has many fund managers buying higher beta -- or more volatile -- names, particularly those managers who were underinvested when the market reversed on Oct. 9. Many believe such factors will provide support for major indices through year-end, at least. Among them is Bensignor, who sees the S&P trading at 830 at worst, and only gives a 30% chance of that occurring for the balance of the year. Furthermore, he "continue
s to favor high-beta names" in tech hardware and equipment, software, semiconductors, telecom media and, on relative weakness vs. the S&P, pharmaceuticals.
Bears vociferously contend still-flagging fundamentals suggest all this is destined to end badly (again), and they may very well prove right (again). But for now, tech is where the "action" is. Furthermore, the group's performance is starting to garner the attention of mutual fund investors (presumably not the same ones who "swore off tech forever.")
Inflows into growth-sector funds have been positive for three of the past four weeks and, for the first time since August, for two consecutive weeks, observed Brian Belski, fundamental market strategist at U.S. Bancorp Piper Jaffray in Minneapolis. For the week ended Nov. 13, inflows into tech funds totaled $217.7 million after taking in $14.7 million the prior week, he reported Friday.
If such trends accelerate, the recent outperformance of growth stocks will get a secondary boost, especially if some of the $127.9 billion that's gone into money market funds in the past two weeks finds its way into related funds.
The Great Debate, Denouement
A notable sidebar to this week's action was a significant ratcheting up in the rhetoric over deflation, or lack thereof.
vice chairman Roger Ferguson declared "the risks of a general deflation are remote." The Fed nevertheless remains vigilant against signs of deflation's onset, Ferguson added, and will aggressively use all policy tools to combat the (in his opinion) unlikely event of a deflationary scenario.
Fed chairman Alan Greenspan reiterated as much, almost verbatim, during his Congressional testimony on Wednesday.
Notably, stocks didn't react much to either speech. Shares rallied Tuesday but the gains faded late in the day due to a warning by
and revelations of a new audio recording of Osama bin Laden. On Wednesday, stocks hit session lows following Greenspan's speech, then rallied on news of Iraqi acceptance of the United Nations resolution before fading (again) late in the day amid reports of a Justice Department investigation at
The market's rather ho-hum response to Ferguson's and Greenspan's rather strong comments on deflation suggested, to some, that market participants weren't terribly worried about the issue after all. To others, the lack of upside suggested concern that the Fed doth protest too much; that is, by strongly stating deflation isn't a threat, the central bankers were admitting concern.
"Fears of deflation may have played more of a role in the Fed's rate decision
on Nov. 6 than Greenspan has led us to believe," observed Bear Stearns.
Notably, that came from Bear Stearns' technology group, albeit via their economics department. The intense concern about deflation could be due to the continued overemphasis of the tech sector (see above), which has experienced tremendous dislocations since March 2000. Also, Wall Street itself is going through a major upheaval as indicated by reports this week of more layoffs, notably at Merrill Lynch and Lehman Brothers, and ongoing scandals involving sell-side analysts. On Friday,
reportedly agreed to a $200 million fine related to actions of its one-time star Jack Grubman.
Clearly, this is an emotionally charged subject. A number of readers believe that
deflation is imminent and unavoidable, and that
suggestions to the contrary lack merit.
Maybe so, but there also seems to be a lack of a clear definition of deflation. Many describe it as a sustained economic weakness accompanied by declining prices, but that is "as inadequate a description as the conventional definition of a recession" (at least two quarters of declining GDP), according to Jim Grant.
In a recent issue of
Grant's Interest Rate Observer,
he defined deflation as "a comprehensive state of economic contraction characterized by falling prices and wages, shrinking credit, vanishing asset values, collapsing profits and declining GDP."
Certainly, great hordes of financial assets have "vanished" since March 2000 and corporate profits collapsed at a staggering rate, although there are signs (certainly hope) that both are recovering. Credit has done anything but shrink, at least on the consumer side; average monthly credit growth of $8.7 billion through September is up from an average of $8.1 billion in 2001, according to Briefing.com.
Meanwhile, wage gains have been sustained, albeit for those still employed, and price declines appear to have reversed. Friday's much-stronger-than expected producer price index report for October put the index's year-over-year growth rate at 0.6% vs. a 50-year low of negative 2.7% in May.
Friday's PPI data shows "that deflation does not exist and that the Fed rate cut in November was a mistake," commented Brian Wesbury, chief economist at Griffin, Kubik, Stephens & Thomson in Chicago. "With the real federal funds rate
i.e. fed funds adjusted for inflation at its lowest level since 1980, inflation is the true risk and bond yields will move significantly higher." (This week, the yield on the benchmark 10-year note rose 17 basis points to 4.03%.)
Finally, if you take the inverse of Grant's definition of deflation, one could argue there was a lot of
in the 1990s, although few economists, policymakers or readers would agree with that assessment.
Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
Aaron L. Task.