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BOTTOM LINE: Overall, last week's market performance was slightly positive considering recent gains, the bounce in long-term rates and the jump in natural gas prices. The advance/decline line rose, sector performance was mixed and volume was above average on the week. Measures of investor anxiety were mostly higher. The average 30-year mortgage rate declined for the second week in a row, falling to 6.26%. This is 105 basis points above all-time lows set in June 2003. I continue to believe mortgage rates will head modestly lower over the intermediate-term. However, the benchmark 10-year T-note yield rose 9 basis points on the week as most economic reports exceeded optimistic expectations, resulting in less hope for an imminent Fed “pause.”
Small-caps and cyclicals continued to outperform on increasing optimism over the unrelenting strength of the economy. US economic growth has now exceeded 3% for 10 straight quarters, the best streak since March 1986. Moreover, corporate profit growth has reached double-digit rates for 14 quarters in a row, the best run since at least 1936. It is quite possible that there has never before in US history been a greater disconnect between economic perception and reality. A recent poll by American Research Group found 43% of Americans believe the US economy is in a recession. The common definition of a recession is 2 consecutive quarters of economic contraction.
Gold rose again this week on continuing international diversification into the precious metal. I still believe the rise in gold is not a result of increasing inflation fears. Unleaded Gas futures bounced modestly from recent losses, but are still 45% below September highs even as refinery utilization still remains below normal as a result of the hurricanes. Natural gas supplies decreased this week, but remain 6.3% above the 5-year average for this time of year even as a substantial amount of daily Gulf of Mexico production remains shut-in. Natural Gas has now dropped 11% from recent highs. I still believe global energy demand destruction and a substantial increase in supplies into 2006 will continue pushing energy prices substantially lower over the intermediate-term. The S&P 500 is still within striking distance of my mid-year prediction of a double-digit annual gain. The index is currently up 6.2% for the year.
*5-day % Change