Weekly markets commentary – November 17, 2009

David Joy — Chief Market Strategist, RiverSource Investments

Retail Sales Support Rally

A stronger-than-expected report on retail sales and a benign speech by Federal Reserve Chairman Ben Bernanke kept the rally in equities rolling on Monday, in the process pushing stocks to new post recession highs. Helping was a weekend pledge by Asian nations to keep economic stimulus programs in place.

All of this follows last week's gains, which saw Nasdaq Composite Index lead the way with a gain of 2.6 percent, the Dow Jones Industrial Average add 2.5 percent, and the S&P 500 Index add 2.3 percent.

A healthy percentage of the 1.4 percent gain in October retail sales was due to auto sales, which rebounded nicely from the weak September numbers after the expiration of the "cash for clunkers" program. But the report did give rise to the possibility that consumer spending just might be a little stronger than expected going into the holiday shopping season.

Retail stocks were particularly strong in response. At the same time it should be noted that consumer credit continued to contract in September at the fastest annual rate since WWII, according to data released last week by the Fed.

Dollar weakness lent support to commodity prices again last week. The DXY index slipped 0.7 percent to 75.42. Gold continued its rise, climbing $21.00 to $1,116.70 an ounce, while copper added $2.00 to close at $297.25 a pound.

The currency's weakness was not enough to prop up energy prices, however, which were pressured lower by bulging inventories. Crude oil settled lower on Friday by $1.08 a barrel at $76.35. Natural gas fell $0.20 to $4.39 per million BTU.

On Monday, however, further dollar weakness in the wake of Chairman Bernanke's speech helped drive energy prices sharply higher, taking oil to $79.00 and drove gold prices up another $12.00.

It is unlikely that the strength in commodity prices is exclusively the result of a weaker dollar. Certainly, some of the rise in prices is attributable to rising global demand, or the anticipation of future demand.

If so, that raises the possibility that a cessation in the dollar's decline, even temporarily, which is a possibility given the severity of its decline, may not signal a meaningful correction in commodity prices, nor an interruption in further gains.

Overseas markets were also mostly higher last week. Europe showed particular strength; led by a 3.4 percent gain in the U.K. Japan was a notable exception among developed markets, declining 0.7 percent. On Monday, Japan announced better-than-anticipated third-quarter growth of 4.8 percent. However, still battling deflation, in nominal terms the report was far weaker.

Emerging markets were quite strong last week. Among the BRIC countries, Russia climbed 5.2 percent, while India gained 4.9 percent and China added 3.3 percent. Brazil managed to gain only 0.5 percent.

The Week Ahead

Having successfully absorbed the retail sales report, investors must still this week negotiate reports on industrial production, housing starts, consumer prices, and weekly jobless claims.

The possibility of stubbornly high unemployment as the recovery progresses has led some to question the ability of the consumer sector to contribute meaningfully to a sustainable recovery. However, the rise in asset prices over the last six months will contribute to the ability of consumers to spend, and there is some evidence to suggest that employment could once again begin to grow as early as next year's first quarter. The trend in weekly jobless claims and the rise in the use of temporary workers imply that job growth may not be as far off as some assume.