The markets are enjoying a solid rally today, with the S&P 500 and Russell 1000 Growth indices both up more than 1%. Of course, given the volatility of late, this could all change in a matter of seconds or by the time I finish this blog entry.
Nevertheless, a couple of things, stick out in today’s rally.
First of all, oil prices have slipped to the low $130′s on higher inventory data and hints of diplomacy with Iran. The decline in oil is most clearly seen in the rally in consumer discretionary stocks, many of which are up more than 5% today. Clearly, oil has been a severe headwind for the consumer and the extent to which it can reverse course would be a huge benefit for the performance of discretionary shares.
Second, Wells Fargo reported earnings that were quite good given the environment and in a very bold move actually raised their dividend. This action flies in the face of just about every other banking company out there and suggests that great management can make a difference in the industry. Wells Fargo was on our short list of banking stocks to buy when it pulled back to recent long term support levels, but given the reaction of other banks stocks to cuts in dividends, we just couldn’t pull the trigger. Today, the stock is up 25% to where we had taken a closer look. So, while it would have been nice to own the stock today, I guess we’d still have been flat on the position even if we had bought it at the time. What a ride!
The Wells news is having a positive effect on other financial services companies and suggests that the recent downdraft in the markets hit the fear stage head on. I say this only because this morning’s inflation news wasn’t so good, with both core and non core CPI well ahead of expectations. Normally, the markets would have been down on such news, but the reaction today suggests that the far greater evil has been the worsening credit crisis.
Hopefully, the run in commodity prices is on its last leg and oil will continue to slide back to a longer term trend that is more sustainable. Such a move would not only be good for the consumer, but would also suggest a peaking in inflation expectations. As we’ve said before, a slowdown in the growth of emerging market nations like China will be a key factor in what happens to commodities in the short run. Perhaps the Olympics, after all, will mark a key turning point.
Blog entry done. Ten minutes later and the markets are still up over a percent. Better quit while we’re ahead.
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