After quite a week of trading, equity markets are likely to finished the Friday trading session flat, as improving consumer sentiment here at home and as encouraging data points from China have come together to assuage the rising fears of the upcoming fiscal cliff.
Perhaps the most encouraging item today was that consumer sentiment landed better than expected, reaching the highest level in more than five years. The University of Michigan Consumer Sentiment November preliminary result landed at 84.9, which was higher than the Street's expectation of 83.0, increasing from the 82.6 reached in October. The result represented the highest reading since July 2007, before the recession had even begun. It is apparent that consumers' sentiment continues improving as they are finding their current financial positions to be improving, as an increasing number of people have been reporting recent income gains. Improvements in the housing markets are also positively contributing to the positive feelings of consumers. The fact that the jobs backdrop appears to be slowly improving may also be giving a stronger sense of hope to consumers.
Also encouraging was that consumer's outlook increased for a third consecutive month. The expectations index ramped higher, increasing to 80.8 from 79.0. Consumers appear to continue seeing improvement in the national economy and, more importantly, in the jobs market during the year ahead. While consumers still expect inflation, they expect this to attenuate in the near term. They projected prices will rise 3.0 percent over the next 12 months, compared with 3.1 percent in the prior survey. Over the next five years, Americans expect a 2.8 percent rate of inflation, flat with 2.8 percent in the previous report.
Over in China, it was very encouraging to see that both industrial production and retail sales landed nicely above economists' forecasts. In October, Chinese factory output increased 9.6 percent on a year-over-year basis, landing above the Street's consensus of 9.4 percent. Concurrently, retail sales in the world's second largest economy increased 14.5 percent from the level reached in the prior month. So far it is becoming apparent that the Chinese central bank's actions to boost their economy are working, but more encouraging is that inflation is not ramping out of control as it increased just 1.7 percent, giving the bank room for further easing.
Clearly, investors are continuing to be fearful of the upcoming fiscal cliff, which if left untouched will have the nation as a whole paying more than $600 billion of tax increases, along with spending cuts that will trigger automatically next year unless Congress acts. However, we believe that this will be resolved as no one will be that insane as to allow the economy to plunge into another recession just to prove a point.
Sandy Troubles Continue
The office finally got heat back this morning (I am typing this piece with feeling in my hands, a first for the week)! However, there are plenty of others that are still without power, heat, or running water. Staten Island continues to struggle, the red tape is off and FEMA and other state and federal agencies are getting the aid out there. For everyone who says New Yorkers are rude, selfish, and conceited, take a look at the lines of cars trying to cross the bridge and the number of pedestrians waiting for the Staten Island Ferry. There are people with bags and boxes full of supplies ranging from baby diapers and formula to snack food to warm clothing. That is the real New York.
Anyway, almost 33% of the 101 million square feet (9.4 million square meters) of lower Manhattan office space was out of operation as of Nov. 7. There are 445 office and residential properties in the area that the city determined may be uninhabitable even while they may have no structural damage. The streets are empty; offices which normally are a flurry of activity lay dormant. Many of the restaurants are still closed as they don't have power (I had to do a little research to find the closest Chipotle that was open today for my weekly Friday lunch). The New York Daily News, which has an office at 4 New York Plaza (right on New York Harbor) is expecting to be out of their office for up to a year. AIG and Morgan Stanley (NYSE:MS) have also been displaced by the storm.
Normally, on the trek to the subway after work, you are bombarded with fast walking Wall Streeters. Now, walking past the Stock Exchange it is mostly tourists that you have to weave in and out of. The cleanup continues. Now that most of the water has been drained, the debris is now in the midst of being removed, and once that is done, then the repairs begin. I am shocked at how well and quickly the city has bounced back. The subways were running after only a few days, yes there are delays, but power has been restored to most of Manhattan; Queens and Brooklyn are quickly being restored as well. New Jersey was hit much worse, but other states are chipping in. That is what America is about!
Rest of the Session
Well, there looked to be some hope in the markets today ahead of respective speeches from House Speaker Boehner and President Obama. We had a nice gain this morning, but it all fizzled as the President spoke. Speaker Boehner continues to sound decidedly more open to negotiation than he has in the past, and seemed to imply that a deal could well be on the table for the upcoming fiscal cliff. At the same time, he continued to reiterate his stance that tax increases not be part of this deal. It's a logical thought considering we're seemingly on the precipice of recession here in the economy, and taxes only hurt growth.
And so President Obama took the stand shortly after, and that's when the market turned south; and quickly. The President of course says that he is open to negotiation to work out a deal on the budget. But the vast majority of his speech was devoted to reiterating his desire to raise taxes on the wealthy, with not a lot of mention about cutting spending. And so, the market quickly picked out that the President and the Speaker maintain opposing views on the issue.
Now the Dow is slightly in the red, and you have to think this fiscal cliff talk is going to be an albatross around the market's neck until it's either negotiated successfully, or heaven forbid, left unresolved.