Fueled by the long-awaited elections and the Federal Reserve’s announcement of quantitative easing, investors pushed stocks higher for the first week of November through the market close on Thursday. The Standard & Poor’s index was up 3.19%; the Dow Jones Industrial Average was up 2.85%; NASDAQ was up 2.79% and the Russell 2000 closed up 4.28%.
Investors also heard a significant amount of good economic news this week. Monday’s Institute for Supply Management (ISM) Monthly Manufacturing Index reported manufacturing activity unexpectedly rose to 56.9 in October from 54.4 in September. October marks the 15th consecutive month with a reading above 50, and as we have said before, a reading above 50 indicates the economy is expanding. ISM’s Services Index rose slightly to 54.3, indicating economic growth outside of manufacturing accelerated in October.
ADP’s Employment Report on Wednesday, indicated private-sector employment grew by 43,000 jobs in October, nearly doubling economists’ estimates of a 22,000 job gain. The Department of Labor reported Friday morning that nonfarm payrolls rose by 151,000 last month, as private-sector employers added 159,000 jobs. However, the unemployment rate remained at 9.6% in October.
The biggest news came by way of the Federal Reserve’s plans to purchase an additional $600 billion of longer-term Treasury securities by June 2011 at a rate of about $75 billion a month. This second round of quantitative easing has been dubbed QE2. The Fed’s first quantitative easing program amounted to $1.75 trillion in bond purchases that ran from December 2008 through March 2010. Quantitative easing is the Fed’s method to increase the money supply by buying government securities, or other securities from the market, which then floods financial institutions with capital.
Following the announcement we saw shorter-term yields fall, but the 30-year Treasury yield actually rose this week to 4.03%. The two-year treasury hit another all-time low at 0.31%; the five-year Treasury also touched an all-time low of 1.03%, while the 10-year Treasury fell to 2.48%.
While September’s consumer savings rate dropped to 5.3%, the lowest level since March, The Fed’s motive behind QE2 is to keep long-term interest rates low in hopes of inducing consumers to stop saving and begin spending, and for companies to invest more. However, the market sees the action as adding to the risk of inflation. Gold was up 2.42% for the week on Thursday; oil prices increased 6.2%, and most commodities followed suit. Additionally, Treasury Inflation-Protected Securities sold at a negative yield for maturities through early 2018. Still, the Fed feels that measures of underlying inflation are somewhat low, relative to levels that they judge to be consistent over the longer run. We hope the Fed has enough tools in place to keep inflation in check, or at least prevent stagflation, an environment with relatively high unemployment accompanied by a rise in prices.