Poised For The Christmas Rally?

Since experiencing the late November 10% market correction, when stocks fell from their October high of 14,164.53 to 12,743.44, investors have been looking for a reason to believe the current bull market was not on its way to extinction. Wednesday's data gave plenty of reasons to believe there is still some upside potential in this market. While the disruptions in the housing and credit markets during the late summer and fall are still very much in the picture, I am sure the Fed has got to feel it has some breathing room, insofar as monetary policy is concerned, going forward.

On Wednesday, the U. S. stock market added 196.23 points for the day after data released in the morning cast a more optimistic light on the U.S. economy, while leaving intact hopes of another interest-rate cut next week. Before the opening bell rang, major stock index futures had extended early gains after ADP reported hiring in the private sector expanded at a faster pace in November, gaining 189,000 jobs after a revised 119,000 jump in October. The latest monthly hike is well above forecasts calling for a rise of 60,000. In another report, the Labor Department said productivity in the nonfarm business sector rose at a 6.3% annual rate in the third quarter, an upward revision from the 4.9% tally a month ago. Also, the government revised unit labor costs down, showing a 2% annual decline compared to a 0.2% drop estimated a month ago, which signals milder inflationary pressure than previously thought. Later in the morning, the Commerce Department said orders for U.S. made factory goods climbed 0.5% in October, its biggest increase in three months. The Institute for Supply Management repoted its nonmanufacturing index declined to 54.1% in November from 55.8% in October, with the drop larger than expected. "The economic news that we got today was quite positive. We saw factory orders go up and we saw the non-manufacturing sector continue to grow," said Peter Cardillo, chief market economist at Avalon Partners.

A great article in the Wall Street Journal recently dicussed some of the lessons that were hopefully learned by investors during this wild year. Dan Fuss, of Loomis, Sayles and Co., stated one of the lessons investors should have learned this year is that "The worst thing you can do is get into frequent asset reallocations. There's a financial cost going from fund A to fund B. The more important cost is that it messes up your thinking about what it is you want to accomplish with these funds". John Bogle of Vanguard Group feels the lesson learned this year is "Don't let your emotions drive your investment program, because you will be thinking of getting in and out. For investors the best rule by and large is to ignore daily moves of the stock market". Jeremy Siegle of the Wharton School of Business opined, "It's very important not to be caught up in the prevaling sentiment, because usually those are not good times to sell when the market is going down. In fact, this is really an illustration of the importance of what we call dollar-cost averaging".

Disciplined, non-emotional investing has been my mantra over the years and is definitely the way to go for investors. Dollar-cost averaging works quite well in volatile markets like we have seen this year, because the chance of buying shares on sale increases when monthly purchases are made in a volatile year. It is fantastic to have such respected business and investment colleagues reinforcing what you've always believed.

John Kaighn

Jersey Benefits Advisors

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Summer Solstice Heats Things Up!

Among other items of interest, such as the Commerce Department's release of data on housing starts and the Labor Department's disclosure of data on weekly jobless claims, this Thursday will be the longest day of the year as the summer solstice marks the official start of summer. Right on target, the temperatures here in the east are set to reach into the 90's, providing a scorching beginning to this festive season. With the core inflation reports of last week being somewhat benign, after stripping out the highly volatile food and energy prices, the market ended the week with a bang and could be poised, like the mercury, to creep up further this week.

Overall, the most recent economic reports seem to be verifying the renewed strength of the economy after the mid cycle slowdown, which we've discussed previously. With bond yields surpassing the 5.25% mark briefly last week, bond investors have realized the next move by the Fed on interest rates may be an increase, although my personal belief is that until the depth of the housing slump and subprime mortgage debacle is determined, the Fed will be on hold. Once again, the yield curve is sloping in a positive direction, which bodes well for economic strengh. Perhaps the inversion of the yield curve for part of 2006 was merely indicating the mid cycle slowdown that occurred, and not predicting recession!

So as you mark the summer solstice with whatever ritual suits your tastes, remember the economy and the markets have some upside potential left, even if we do begin to see some increased volatility going forward. I can't say this enough, but it bears repeating, that the markets are not predictable on any given day, and rarely go up without retreating. This ebb and flow of stock prices is what keeps things interesting and allows the supply and demand of stocks to be reset as the psychological drama among investors unfolds. Happy First Day of Summer 2007!

John Kaighn is a Registered Investment Advisor with Jersey Benefits Advisors and writes articles on various business and investment information, ideas and opportunities. For more information about this and other topics you can visit http://www.johnkaighn.com and http://www.jerseybenefits.com