The major US stock market indexes continued to rise over the course of last week, resulting in new highs for 2009.  The Dow moved above 10,000 last week for the first time in more than a year as investors pumped up the market on strong earnings and better-than-expected retail sales.  The 10,000 level for the Dow actually carries very little meaning, other than the psychological impact that it may exert on the droves of investors still in cash on the sidelines, and waiting for a reason to invest fully in the markets.  While the markets have had a very good run, it does seem as though many investors have forgotten the events of last year, and believe that everything is back to normal in the market aside from a few names missing in the financial sector.  In fact, the markets still have a long way to go before reaching new highs over last year and recouping the losses incurred during 2008.  To give you some perspective, the NASDAQ is the closest to reaching a new high over last year, needing only to increase another 23 percent from its current level.  The S&P 500 and the Dow need to move up another 29 and 33 percent, respectively, in order to attain a new high.  Right now, many companies are reporting earnings from the third quarter.  This could continue to push the markets higher, provided that the earnings are as expected.  Still, many other pieces must fall into place to sort out this economic puzzle and result in the markets making a full recovery.

 

One of the largest puzzle pieces has to do with the US consumer’s balance between spending and saving, and how it will affect the economic recovery.  Up until recently, the recovery has been almost entirely dependent on government stimulus.  Now, it appears as though another entity should take the lead.  That entity will have to be the consumer, which has made a methodical shift from easy spending to precise spending (and saving whatever is left over).  We continue to see this trend through the results of various retailers that have reported earnings; most high-end retailers are continuing to feel the pinch while the discount retailers have started to see sales pick up.  While this is not a good sign for the high end retailers, it is a somewhat positive sign for the economy, and may signal a bottoming in the spending cycle, provided that the US consumer goes back to the spending habits they had prior to the correction.

 

For the week, the three major US indexes increased in value, led by the S&P 500 gaining a little more than one and a half percent, followed by the Dow gaining a little less than one percent and the NASDAQ gaining a little more than an eighth of a percent.  The commodity sector led the way last week, returning more than five percent, with the energy sector coming in a very close second.  Semiconductors and real estate led the lagging sectors.  Oil spiked upward nearly nine percent for the week, while gold turned in a meager increase of only one-third of a percent.

 

 

For the trading week ending 10/16/09, the returns in our portfolio models were as follows:

 

	Last Week	Year to Date	Since 12/31/07
S&P 500 WD (benchmark)	1.55 %	22.82 %	-22.61 %
Aggressive Model	1.23 %	8.59 %	-4.44 %
Growth Model	1.04 %	7.97 %	-2.85 %
Moderate Model	0.60 %	5.89 %	-3.61 %
Stable Model	0.98 %	8.23 %	-2.87 %

 

Over the course of last week, we made a few small changes to the portfolio models and added one new market sector into the mix.  The new market sector we bought into is the commodity space because it moved through its previous high, while continuing to shows signs of picking up momentum.  The commodity sector currently has many drivers pushing it higher; everything from increasing potential demand as the recovery gets fully under way, to better-than-expected earnings by some of the larger industry players.  Another change we made include tweaking some of our core positions in both the aggressive and growth models in order to increase the amount of cash we have on hand.  This way, we have cash available to invest when we receive signals that it is a pertinent time to buy.  Lastly, we moved some of the models’ emerging market positions from Russell emerging markets (REMSX) to Direxion Funds Emerging markets (DXELX) in order to take advantage of the 2 times leverage and tradability of the Direxion fund.

 

Economic Wrap Up: Last week, a lot of economic news was released, with the vast majority seeming to be good for the overall economy.  One of the most surprising news releases was the retail sales figures for the month of September, which fell by a lot less than expected.  In fact, if you take out the dismal automotive sales (which everyone saw coming after cash for clunkers), retail sales were actually up by half of a percent.  Released the same day as the retail sales figures was the business inventories figure, showing a decline in inventories during the month of August of one and a half percent.  This lagging indicator came as no surprise.  The FOMC meeting minutes provided the last piece of economic news of last Wednesday, and held some insight into the rift that appears to be growing amongst the various members.  There seems to be a stronger split than usual over many of the policies that are currently in place and what should be done in the future.  One thing to consider is that the members of the voting committee will rotate out of their positions on the one year cycle, and the new members come in 2010.  On Thursday, there were multiple releases that seemed to affect the markets.  First up were the employment related figures.  Both initial jobless claims and continuing jobless claims showed better than expected results; the figures were lower than both the previous reading and current estimates.  The CPI data was also released on Thursday to show that inflation is currently of little concern to the market.  The Empire Manufacturing index for the month of October rose considerably more than expected, nearly doubling the previous reading.  This indicates that manufacturing is picking up in the New York area, as new orders and shipments skyrocketed.  On the flip side, the Philadelphia Fed reading came in worse than expected for the month of October, a clear signal that the US economy is still in the woods.  Wrapping up last week was the preliminary reading of the Michigan sentiment, which was shown to have slipped a little during October.  While this reading is negative for the economy, it is only the preliminary release and can change by large amounts prior to the final release.

 

After last week’s exciting economic news releases, this week will be quieter.  The scheduled releases for this week start off on Tuesday with the two housing-related figures for the month of September as well as the producer price index, also for the month of September.  Both of the housing figures (building permits and housing starts) are expected to show improvement over August, which should add fuel to the thought that the housing market has turned the corner.  One potential problem for the housing market could come up when the first-time home buyers who have been scrambling to meeting the deadline for the $8,000 tax credit stop purchasing once the tax credit expires.  We could end up seeing a sharp decline in purchases, much like we saw after the cash for clunkers program.  On Wednesday, the Fed’s beige book is released and is not expected to hold any new insights.  Wrapping up the week is the existing home sales figures for the month of September, as well as initial and continuing jobless claims figures.

 

Financial Planning Tip: 2010 Social Security COLA

 

The government announced last week that Social Security recipients won’t get a cost-of-living adjustment (COLA) next year for the first time in more than a third of a century. More than 50 million Social Security recipients will see no increase in their 2010 monthly payments, the first year without an increase since automatic adjustments were adopted in 1975.

 

Falling consumer prices may be to blame. By law, cost-of-living adjustments are pegged to inflation, which is negative this year because of lower energy costs. Social Security payments do not go down, even when prices drop. Consumer prices in general have declined 2.1 percent since the third quarter of 2008. The Social Security COLA is based on the change in consumer prices from the third quarter of one year to the next.

 

2009 Social Security payments increased by 5.8 percent – largely because of a 2008 spike in energy prices. This was the biggest COLA since 1982. The average monthly Social Security payment for all recipients is $1,094.

 

President Barack Obama and democratic leaders in Congress have proposed a plan that would provide $250 payments to about 57 million senior citizens, veterans, retired railroad workers and people with disabilities. The proposed plan would cost an estimated $13 – $14 billon.  The President has not said how the payments would be financed, leaving that up to Congress.

 

The payments would match the ones issued to seniors earlier this year as part of the government’s economic recovery package. They would be equal to about a 2 percent increase for the average Social Security recipient

 

The lack of a monthly increase in Social Security payments triggers several provisions in the law. Among them, the amount of wages subject to Social Security payroll taxes will remain at $106,800, unchanged for 2010. The earnings needed to earn one Social Security credit will increase to $1,120 in 2010, up from $1,090 in 2009.