Blog : Penny Stock Week: Consumer Spending Drives Rally

by Ed Zwirn on December 23rd, 2013

Stocks are trading up sharply this morning as investors head into this abbreviated holiday trading week with visions of sugarplums dancing in their heads following a report showing a 0.5% rise in personal spending in November, following November's upwardly revised 0.4% rise, despite an increase of only 0.2% in personal income.

Monday morning's income and spending reports coincide with other evidence, particularly from last week's Q3 gross domestic product estimate, that consumer spending is rising as the job market picks up and stock and real estate prices stimulate spending by increasing apparent household wealth.

This follows a week which saw the market break its two-week losing streak, with the Dow Jones Industrial Average closing Friday at a record 16,221.14, up 2.9% from the prior week's 15,755.36. Penny stocks and mid-sized companies participated in last week's rally, with the NASDAQ Composite up 2.6% and the small-cap Russell 2000 up 3.3%.

The Dow in fact reached an even more significant milestone last week, hitting an inflation adjusted all-time high by passing a record close seen in January 2000, finally clawing its way back from 9-11, Enron and other less violent financial spasms that have hindered economic growth over the past decade.

Propelling these gains was, first and foremost, the benign market reaction to the U.S. Federal Reserve's Wednesday announcement that it would trim its $85 billion monthly bond purchasing program by $10 billion starting in January, while continuing to hold on to its growing balance of Treasury and mortgage-backed securities. The announcement, which confirmed widespread expectations, nevertheless boosted the market significantly by eliminating much uncertainty about Fed intentions. 

Two days later, investors were pleasantly surprised to find out that the third official estimate of U.S. gross domestic product for Q3 registered a much-higher-than-expected 4.1% increase, the best showing for the economy since Q4 2011's 4.9% growth rate and a sharp pickup from Q2 2013's 2.5%.

The latest estimate, up sharply from the earlier 3.6%, was bolstered primarily by a strong consumer spending component, giving rise to both the hope that U.S. economic growth may be proceeding more quickly than observers had thought and speculation over whether or not this pickup will be the start of a more sustained trend, allowing for the possible upward revisions of growth projections for 2014.

Other economic news which came out last week included:

--Monday morning's industrial production report for November, which showed a much-higher-than-expected 1.1% increase, a sharp spike from the upwardly revised 0.1% rise recorded for October.

--Tuesday's consumer price index, which had been expected to show a 0.1% November rise, instead showed overall prices remaining flat, after falling 0.1% in October. The "core figure," which excludes more volatile food and energy costs, rose by a higher-than-expected 0.2%, a pickup from the prior month's 0.1% increase.

--On Wednesday morning, the government released three months of housing starts data, catching up following October's government shutdown.

September housing starts were found to have weighed in at a lower-than-expected 873,000, down from August's upwardly revised 883,000. October's 889,000 also proved somewhat of a disappointment. But the most recent report shows a strong (1.091 million) showing for November, higher than the consensus 950,000.

--November building permits at 1.007 million also beat out the consensus, but represented a slowdown from October's upwardly revised 1.039 million.

--Thursday morning's November existing home sales report reinforced the impression of mixed progress in the housing sector, coming in at a lower-than-expected 4.9 million, a slowdown from October's 5.12 million.

Looking ahead this week:

--Tuesday will see the release of a durable goods orders report expected to show a 2.2% rise for November, following a 1.6% fall the previous month. Excluding transportation, the increase is expected to come to 0.6%, an increase from October's 0.4% rise.

--Later that morning, the market is expecting to see a 433,000 November new home sales figure, following October's 444,000.

Taking Stock: What Do You Think?

As I write my penny stock blog, the Dow Jones Industrial Average is up 16.6% so far this year. The broader market, led by penny stocks, has outperformed the 30 DJIA blue chips, with the NASDAQ Composite up 36.9% and the small-cap Russell 2000 ahead by 35.7%.

Clearly, the year which comes to a close has seen many investors profit handsomely, with the market gaining despite significant headwinds coming from both overseas and at home. In my final blogs of the year, I will attempt to summarize the events which have driven these gains over the past year and make some educated guesses about what is in store for us in 2014.

But what do you think?

Are we finally seeing the start of a sustained economic uptick or are we in fact in the midst of a bubble waiting to burst? The evidence is ambiguous so far. Which sectors of the economy stand to do well in 2014, and what does this mean for the penny stock portion of your portfolio? Give me your educated guesses, and then we can all get together in one year's time and see how wrong we were.