The S&P 500 Index is looking pretty good right now. It is seemingly trying to break out of its three-month trading range, which is a very positive development for the stock market. Not only are investors coming back to the market because of more certainty towards the European debt crisis, but also corporate earnings are coming in solid and there’s been an uptick in domestic economic data. Clearly, this is a stock market that wants to go higher over the near term, providing there are no shocks to the system and the debt crisis doesn’t get much worse.
Third-quarter numbers are now pouring in and, for the most part, large corporations are reporting very good financial results with solid expectations for the future. Smaller companies are only now beginning to report their numbers and there is a lot of anticipation in the marketplace.
Investment risk for equities still remains high at this time, but the stock market has been looking for a catalyst to move higher for quite a while now. There hasn’t been any one big catalyst getting institutional investors to buy shares; it’s been a multitude of factors that are now beginning to come together (no one knows for how long) to create just a little more certainty in the marketplace.
As I’ve been writing (see The Correction Within the Current Bear Market Rally: Will it End Soon?), all the stock market needs is for the European debt crisis to be handled decisively and with a timetable, and capital markets will applaud the move and buyers will return. Institutional investors in particular have been sitting on the sidelines, building up cash waiting for an opportune time to add to positions. Now we’ve got some more positive fundamentals for the stock market so the players are beginning to make hay while they can.
Union Pacific Corporation (NYSE/UNP), which is an important railroad benchmark, reported third-quarter revenues that grew solidly and, in spite of higher prices for fuel and slightly slower growth in total shipments, the company grew its earnings based on higher prices. This is a very good sign for the domestic economy and for the Dow Jones Transports Average, which is itself looking like it’s about to break out of its recent trading range.
I don’t want to be too optimistic about the near-term trading action in the stock market. There’s so much out there that can derail (pun not intended) the market’s recent progress. But, with corporate earnings coming in solid once again and overall stock market valuations that are reasonable, a 10% gain for 2011 is not unreasonable as far as I’m concerned.
The key going forward is certainty—it’s not about how much sovereign debt is out there or whether Greece will default on its loans or not. Capital markets want certainty that policy-makers have a plan in place to deal with the situation. With this, the marketplace will go back to placing their bets.