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This week stocks surged, extending the biggest monthly rally for the Standard & Poor’s 500 Index since 1974, and the euro strengthened as European leaders agreed to expand a bailout fund to stem the region’s debt crisis. The 20 percent monthly advance for the Dow Jones Transportation Average, a proxy for the economy, is the biggest since 1939. The S&P 500 rose to its highest level in almost three months and has rebounded 17 percent since Oct. 3.

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In addition to remembering 1974, economic growth strengthened in the third quarter and the component mix is more favorable than expected. GDP growth improved to a 2.5 percent annualized increase in the third quarter. The advance estimate matched market expectations for a 2.5 percent gain. (For once the majority was right!)

Optimism is clearly now appearing as the consumer sentiment index jumped to 60.9, compared to 57.5 at mid-month, to imply a 64.3 level for the final two weeks of the month. The improvement in the last two weeks is centered in the leading component of expectations which jumped 4.8 points to 51.8. The current conditions component also rose, up 1.3 points to 75.1. Inflation expectations show no change from mid-month, at 3.2 percent for the one-year outlook and 2.7 percent for the five-year.

On the job front, initial jobless claims are holding steady in a narrow range just above 400,000. Claims came in at 402,000 in the October 22 week, a bit better than expectations. The four-week average of 405,500 is 10,000 below the month-ago period to point to continued improvement and a positive October employment report.

Disclosure: No positions

Source: Economic Overview: Remembering 1974, DJTA Surge