November Market Recap

[Greg]

What a difference a month makes. After a weak October, stocks rallied in November, driven primarily by moderating crude oil prices, tame inflation, strong new home sales, surprisingly robust third-quarter GDP growth, and better-than-expected consumer confidence. The data fueled optimism that the national economy may have overcome this summer's devastating Gulf Coast hurricanes.

Both the S&P 500 and Nasdaq indices reached 4 1/2-year highs in November. The Dow rose to its highest level since March, 2005. For the month, the average domestic stock mutual fund gained 4.15%, while the S&P 500 climbed 3.52% and the Nasdaq advanced 5.31%.

U.S. equity funds rose across the board in November, with growth-oriented portfolios outperforming value offerings. Small-cap growth funds delivered the best performance for the month, rising 5.24% on average. [For complete results of more than 5,000 funds, see BW Online's Interactive Mutual Fund Scoreboard].

Year to date, mid-cap growth funds have risen 8.61%, which put them at the top of the list. All fund style categories are in positive territory, both for the month and year-to-date periods.

From the start of the year through the end of November, the average stock fund has gained 6.25%. Over that period, the S&P 500 rose 4.61%, the NASDAQ climbed 2.64%, and the Dow is essentially flat, up only 0.21%.

Standard & Poor's Global Investment Policy Committee [IPC] cited the positive economic environment in discussing the November rally. "Inflation fears appear to have receded," the IPC said in a statement. "Benign core CPI data, coupled with indications in the November FOMC minutes that an end to Fed tightening is approaching, have bolstered investor confidence in future growth prospects."

November began with the Federal Reserve hiking its target rate by 25 basis points, as was expected, to 4.00%. Moreover, minutes from the Fed's latest policy meeting during the month seemed to indicate that the central bank may soon cease tightening.

Energy prices, which have declined sharply, also provided some relief, particularly to consumers' pocketbooks. Crude oil prices closed under $60 per barrel for the month, falling from a record high of nearly $71 at the end of August when Katrina hit the global petroleum industry. But the price of oil is still up for the year and may remain a dampening force on consumer spending and the overall economy. IPC expects the price of West Texas Intermediate crude oil to finish the year at $63.

Investors will no doubt examine the results of the Thanksgiving holiday retail activity and the upcoming jobs report as further confirmation of the sustainability of an apparently strengthening economy.

"The major stock indexes are very overbought on a daily basis, and we believe the market will pull back in the near term," said the IPC. "However, following a pause in the rally, we think the stock market will reach new recovery highs before a likely correction sets in sometime in first quarter 2006."


(Business Week)