Signs of Continued Economic Recovery Sparks Cautious Optimism

Movement in US markets last week revealed that investors are somewhat encouraged by increasing signs of economic recovery – albeit it very slow – creating an air of cautious optimism for the week ahead. Last week ended with the Dow Jones industrial average having remained virtually static, but with the Standard & Poor’s 500 hitting its highest level since September 2008 and the Nasdaq composite closing at its highest point since December 2007. As things stand right now, analysts generally agree that there is a strong possibility for both the S&P 500 and the Dow to finish the year with gains of at least 10 percent, while the Nasdaq looks headed toward a 16 percent gain. The recently published interview with Warren Buffet in which he acknowledges that, while recovery is slow, the economy is definitely in recovery, will surely be a boost to optimism among investors. With some investors still shell-shocked by market volatility experienced since the events of 2008, it is no surprise that any optimism remains tempered by caution. Additionally, concerns over debt problems in Europe and the increase in China’s inflation rate remain a cause for concern. Moreover, the Congressional debate regarding tax cut extension and fiscal stimulus feature strongly in investor decision making. Speculation abounds that if economic recovery continues at a steady pace, the quantitative easing (QE2) program unveiled in November encompassing the Federal Reserve’s plan to buy $600 billion in US Treasuries may be curtailed.

In the week ahead, following a slow start on Monday, Tuesday brings government reports on wholesale retail results, as well as the producer price index (PPI) and core-PPI for November. Corporate news for Tuesday include quarterly result from BestBuy and Hovnanian. The Federal Reserve will release its policy statement in the afternoon, where it is anticipated that interest rates will be held at the close to 0 percent level currently in operation. Reports due on Wednesday include the US consumer price index, a major inflation indicator, as well as the empire manufacturing survey, along with data provided by the government regarding industrial production and the level of capacity utilization. The weekly report for initial jobless benefits claims and initial single family homes construction figures are due on Thursday. Quarterly results are expected from FedEx, General Mills and Research in Motion on Thursday. Friday winds down the week with a reading for November’s leading economic indicators.