Back

What Will it Take for the Rally to Continue?

August 22, 2012

One of the factors underlying the upturn in stock prices over the past couple of months has been a modestly improving trend in US economic data.

-Bob Doll, senior advisor, Blackrock

Stocks Advance During a Quiet Week


In a relatively low-volume week of trading, stocks managed to post some gains yet again, continuing the rally that has been in place since early June. For the week, the Dow Jones Industrial Average climbed 0.5% to 13,275, the S&P 500 Index advanced 0.9% to 1,418 and the Nasdaq Composite rose 1.8% to 3,076.


Is the US Economy Moving Past its Soft Patch? 


One of the factors underlying the upturn in stock prices over the past couple of months has been a modestly improving trend in US economic data. Last week, retail sales advanced 0.8%, well ahead of expectations. This was the first increase in four months, which suggests that while households remain generally cautious, spending levels are beginning to tick higher. We also saw a slight increase in unemployment claims last week, but the longer-term trend on this front has been positive. The August employment data will be released in a couple of weeks and the recent improvements in unemployment claims should bode well for those figures. Additionally, as we have pointed out before, the US housing market has been showing signs of recovery and while we expect that segment of the economy to recover slowly, we do believe that housing has

turned a corner.


The United States is hardly growing at a robust pace, but we are hopeful that the economic soft patch that began in the second quarter is in the process of ending. Our view is that the ongoing and halting recovery should be sustained, provided that we are able to avoid large negative shocks. The two most obvious candidates to derail the current growth trajectory are, of course, financial contagion from Europe and the US "fiscal cliff."


With recent economic data being better than expected, the next steps for the Federal Reserve look unclear. The Fed has been clear that additional easing measures would be contingent on the direction of the data, so at this point the odds of additional easing measures appear to be somewhat reduced. A new round of easing (i.e., QE3) is hardly off of the table, but should economic growth continue to improve its likelihood would diminish.

Read the Full Report