Why Stocks Should Be Higher Today

You'd be excused for wondering why the market is trading lower today. Economic reports released this morning show that home prices continue to rise, consumer confidence is up, and durable-goods orders remained in positive territory for the month of October. In addition, European finance ministers have agreed to release an additional tranche of financial support to Greece, averting a default. Despite all of this, however, the Dow Jones Industrial Average (DJINDICES: ^DJI  ) is down a few points as of 12:10 p.m. EST.

Agreement reached in Europe
Over the last few days, two issues have ostensibly been hanging over the heads of traders. The first is the so-called "fiscal cliff," a series of tax hikes and spending cuts set to take effect at the beginning of next year, absent Congressional action. The current debate hinges on whether and to what extent more revenue will be raised via tax increases and which government entitlement programs should be scaled back.

Warren Buffet weighed in on the issue yesterday in an opinion piece published by The Wall Street Journal. He made the case that there's no evidence that higher capital-gains taxes result in slower economic growth. Indeed, if anything, the reverse seems to more closely resemble reality, as the country's output increased at the fastest pace during the years of the highest marginal tax rates. To read more about this, check out this article by my colleague Morgan Housel.

Beyond the fiscal cliff, however, the other issue weighing on the markets has been concern that the stronger European countries wouldn't release a third tranche of financial support to Greece, effectively triggering a default. This concern was allayed today, however, after a compromise was reached by the continent's financial ministers meeting over the past two days in Brussels. According to Luxembourg's prime minister Jean-Claude Juncker: "All initiatives decided upon today will bring Greece's public debt clearly back on a sustainable path."

Positive news on the domestic front
On the domestic front, a number of economic reports continue to support the notion that the economy is improving.

First, index data released today shows that home prices continued to rise in September. The Case-Shiller index of property values in 20 major metropolitan areas estimated that home prices rose by 3% during the month, on top of a 2% rise in August (both figures are on a year-over-year basis). Economists surveyed by Bloomberg had predicted a 3% increase as well. In addition, a home-price index calculated by the Federal Housing Finance Agency estimated that values actually increased by 4.4% in September compared to the same month last year.

Second, consumer confidence continues its ascent. The Conference Board, a New York-based private research group, released figures showing that its index of consumer confidence climbed to 73.7 in November from 73.1 in October. This is its highest level in more than four years. Economists had predicted the figure to come in at 73.

Finally, orders for durable goods, an important leading economic indicator, showed signs of sustained improvement. Excluding automobiles and aircrafts, orders for long-lasting manufactured goods increased in October for the second consecutive month. Not excluding those items, the figure stayed the same. Meanwhile, economists surveyed by The Wall Street Journal estimated that orders for durable goods declined 1.2% last month.

Individual companies
Technology companies are among the Dow's worst performers, with Hewlett-Packard (NYSE: HPQ  ) and Microsoft (NASDAQ: MSFT  ) among the index's biggest laggards, down 1.3% and 0.6%, respectively. HP has been struggling of late after the company reported worse-than-expected earnings last quarter, due in large part to an $8.8 billion goodwill writedown.

On the upside, alternatively, are financial companies Bank of America (NYSE: BAC  ) and JPMorgan Chase (NYSE: JPM  ) . The positive momentum here is likely tied to the upbeat data emanating from the housing market. To read more about why Bank of America could "double or triple over the next five years," click here to access our new in-depth report on the lender.

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  • Report this Comment On November 28, 2012, at 7:29 AM, ReturnofCapital wrote:

    Loss of confidence in the stock market and in the legitmacy of the financial data reported by companies will keep individual investors like myself away.

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