Equity investors eye recovery
Equity investors are looking ahead to a recovery for economic activity and particularly corporate profits. For the most part, investors don't expect the recovery to start before the first quarter of 2002 and are pretty much discounting evidence of lackluster economic activity such as October's plunge in industrial production. Many economists discounted the surge in October retail sales, but for equity investors the jump promised the seeds of revival.

On a weekly basis, the Dow Jones Industrial Average and the Russell 2000 are at their highest level since August 31. The Nasdaq composite and the S&P 500 are at their highest levels since August 24. Stock prices may have bottomed out.

What a week it was!
The Treasury market witnessed a memorable selloff this past week as the yield on the 10-year note rose from a low of 4.17% on November 7 to a high on Friday of 4.89%. What caused this sharp reversal in bond prices and yields? It seems that bond investors see a double whammy -- strong economic recovery coupled with government deficits. Yet the economic stimulus package has not gone very far and the longer we wait on congressional leaders the bigger the chance that the package will not be very stimulating. Bond investors also feel that the events in Afghanistan may trigger a quick rebound in consumer confidence.

Economists don't agree on the magnitude or speed of economic recovery, but most believe that the bond market may be overestimating both. As a result, many expect Treasury yields to head back down, at least partway.