While economic bulls and bears were hashing it out this week, investors were busy snapping up stocks. Indeed, the major averages rose to their highest levels in over three years, as oil prices declined and portfolio managers chased returns before the end of the year. Few sectors were left behind. Although technology stocks came under pressure Thursday after Micron Technology ( MU) and Red Hat ( RHAT) reported disappointing results, the tech-laden Nasdaq rose 1.2% for the week to 2161. Retail, cyclical and consumer products stocks also moved higher while health care issues gained ground despite continued controversy over Pfizer's ( PFE) arthritis drug Celebrex and more bad news for AstraZeneca ( AZN). Even oil and oil service stocks posted mild gains amid a 5% drop in the price of crude. For the week, the Dow rose 1.7% to 10,827 while the S&P 500 added 1.3% to 1210. While liquidity and momentum have been strong recently, the debate about the economic outlook continues to rage. Earlier in the week, the Conference Board's index of leading economic indicators, a gauge of future activity, rose for the first time in six months. But some economists pointed out that four of the index's subcomponents are still in negative territory, including the yield curve, which is considered one of the best predictors of future growth. Over the prior five months, the LEI had fallen a cumulative 1.3%, the worst performance since mid-1995, suggesting an economic slowdown might be on the way. Sherry Cooper, chief economist at BMO Nesbitt Burns, said the index is misleading, however, because 80% of the decline in recent months has been due to just two indicators -- vendor delivery days and the flattening of the yield curve -- both of which have moved from overextended positions.
A plethora of data Thursday only added to the confusion. Orders for durable goods were considered strong on the surface, rising 1.6% after a decline in October. But some economists said tax incentives, which expire at the end of the year, pulled orders from next year forward. They also note that new orders fell 0.8% excluding transportation, after a drop of 1.3% the month before. A separate report showed that consumer sentiment improved in December while consumer income and spending were both higher in November and inflation remained tame. The personal consumption expenditure price index, which is considered the Federal Reserve's preferred measure of inflation, rose just 0.1% last month, down from a 0.4% rise in October. The core rate, which excludes food and energy, gained 0.1% for a fourth straight month. Still, a hybrid of the core PCE index, made up of only observable prices, increased at its fastest rate in two years. And some pundits remain worried about the consumer, noting that personal income growth has slowed to 2.3% year over year, down from a peak of 3.5% in March and the slowest pace in 14 months. When adjusted for inflation, consumer spending was actually unchanged in November. A sharp plunge in new home sales also offered mixed clues about the state of the economy, as analysts speculated that the drop was largely a result of bad weather. According to the National Oceanic and Atmospheric Administration, last month was the fifth wettest November on record. "We expect at least a partial rebound in sales next month," said Goldman Sachs economist Bill Dudley. Over in the currency markets, concerns about the dollar escalated this week, after French Finance Minister Herve Gaymard said international intervention is essential to prop up the flagging dollar. "If we remain in a situation without any coordination, we can imagine a catastrophic situation" for the global economy, he said.
Gaymard said Asian countries with huge dollar reserves will be punished and long-term interest rates in the U.S. will rise without coordinated action around the world. The dollar also weakened on the expectation that the Bush administration will not change its policy of "benign neglect" towards the dollar in 2005. The greenback fell to a record low against the euro Thursday and dropped vs. the yen. While a severe, rapid decline in the dollar could roil the markets next year, another recent development has the potential to upset stocks, too. This week, Fannie Mae's ( FNM) Chief Executive Officer Franklin Raines and Chief Financial Officer J. Timothy Howard were ousted from the company after the Securities and Exchange Commission said the company broke accounting rules. Fannie Mae now has to restate its earnings to incorporate $9 billion of derivatives losses. Raines said Fannie had "always made good faith efforts to get its accounting right," but
some question whether that was really the case. And with the Justice Department and the Office of Federal Housing Enterprise Oversight also investigating, Fannie Mae, the largest source of money in the U.S. mortgage industry, is in a precarious situation. For now, of course, the glass is half full for equity investors. Fannie ended the week little changed and financial stocks overall rallied, aided in part by gains in Morgan Stanley ( MWD) after the company reported good earnings on Tuesday.