By Kate Gibson, MarketWatch
NEW YORK (MarketWatch) -- After a third week of gains, U.S.
stocks start 2010's final two-week stretch stalled at a 26-month
high, with investors waiting for answers from the Treasury
market.
"The primary question for the stock market is what is going on
in the bond market," said Hugh Johnson, chairman of Hugh Johnson
Advisors.
"There are a lot of questions that have been raised and are
troubling the markets, which seem to be starting to stall out, in
part because of the increase in long-term interest rates, or the
yield in the 10-year Treasury," said Johnson.
The main reason that long-term yields have risen sharply and
stocks have continued to perform decently, Johnson says, is "the
economic numbers have been improving, and that is not likely to
change next week."
Those improving numbers helped lift equities in recent weeks,
and the most recent period was not an exception. The Dow Jones
Industrial Average (DJI) last week gained 0.7%, while the Standard
& Poor's 500 Index (SPX) rose 0.3% and the Nasdaq Composite
(RIXF) climbed 0.2%.
The gains came in a week that included passage of a tax
compromise between President Barack Obama and congressional
Republicans, putting to bed another issue for Wall Street.
"Washington had a grown-up conversation about the deficit and
then increased the deficit," quipped LPL analyst John Canally of
the legislation that extends tax breaks for virtually all.
The debt ceiling, and chatter about the U.S. credit rating being
in possible jeopardy, are among the clouds on the horizon, but
Canally doesn't see serious efforts to mop up the red ink until
after the 2012 election.
The Great Divide
Since March 9, 2009, total returns for the S&P 500 have
risen 91.1%, said Canally, who notes that the rise has come about
without the participation of individual investors. Already
sidelined by the financial crisis and Wall Street's near meltdown,
individuals exited equities en masse after the May 6 flash
crash.
"All the economic data are getting better, we're seeing
cooperation in Washington, and individual investors were buying
high-yield bonds," said Canally, who said many people have a hard
time buying into the idea that corporate profits are rising so much
when the economy's growth is tepid.
The piece that people often neglect is that roughly 50% of
S&P 500 profits come from overseas, "so you don't need to have
booming growth in the U.S." for corporate America to perform well,
he said.
And, while European sovereign-debt concerns continue to weigh on
sentiment, he points out that only 15% to 20% of U.S. exports go to
Europe while the bulk go to China and other emerging markets.
Some of the shifting investor sentiment is playing out in the
bond market -- and stock investors are paying attention.
In recent weeks, Treasury yields, which move in the opposite
direction of price and impact mortgage rates and other consumer
loans, have risen in a rapid fashion. They're coming off low
levels, reflecting the past year's demand for bonds.
The ratio of the 10-year Treasury note yield (UST10Y) to the
earnings yield on the S&P 500 is 0.38%, the lowest since 1959,
said Johnson of Hugh Johnson Advisors. By comparison, the average
is 0.93%.
Conversely, in the first quarter of 2000, speculation in the
market helped drive that ratio to a high of 1.73%.
"That's when the earnings yield in the stock market was a
pittance and you had to be out of your mind to buy into the stock
market. Now anybody who would buy a Treasury is out of their mind,"
Johnson said.
The bond market is now working to close the gap between the
yield on the 10-year Treasury and the earnings yield on the stock
market.
"Bonds were overdone and stocks were not done enough, and there
is too big a gap between the returns on bonds and the returns on
stocks," Johnson said.
Dividends, earnings
The nearly finished year is proving to be a great one for
dividends and the good news is expected to continue in 2011,
according to Howard Silverblatt, senior index analyst at S&P
Indices.
On Friday, AT&T Inc. (T) said it would pay a quarterly
dividend of 43 cents a share, up a penny from prior quarters, with
the telecommunications giant remaining at the top of the heap for
dividend payers, said Silverblatt.
Oil giant Exxon Mobil Corp. (XOM) and Pfizer Inc. (PFE) are the
second and third runners up, by Silverblatt's accounting.
But Silverblatt put his positive spin in perspective, saying
shareholders won't get back to what was being garnered in 2008
until 2013.
The weeks ahead will have the first few companies reporting
earnings for 2010's fourth quarter, with 13 S&P 500 companies
expected to announce results in the week ahead.
Monday's rooster includes Adobe Systems Inc. (ADBE) , Darden
Restaurants Inc. (DRI) , Jabil Circuit Inc. (JBL) and Paychex Inc.
(PAYX)
On Tuesday, the schedule lists half a dozen companies reporting,
with ConAgra Food Inc. (CAG) , Carnival Corp. (CCL) and Cintas
Corp. (CTAS) among those slated. Also on tap: CarMax Inc. (KMX) ,
Nike Inc. (NKE) and Red Hat Inc. (RHT)
Estimated share-weighted earnings for the S&P 500 for the
final quarter of the year on Friday stood at $204.5 billion, above
the prior week's estimate of $203.7 billion, according to Thomson
Reuters analyst John Butters.