Financial Market Update
StrategicPoint of View®
August 2, 2010
Welcome to the StrategicPoint of View -- a market and economic overview of what occurred last week, what's up for this week, and our commentary on the economy and current market activity in general for “Making Money” listeners.
LAST WEEK
Friday’s release of the second quarter GDP (2.4%) confirmed what had been suspected for weeks: the economic slowdown is more pronounced than originally expected. Demand dropped for durable goods orders, although capital spending by businesses rose. The latter is needed to spark hiring. Consumer confidence dipped while consumer sentiment rose (not an uncommon occurrence, as confidence is often associated with labor conditions and sentiment with financial and income situations). On the plus side: new home sales beat expectations and the Chicago PMI (business activity) signaled possible positive reports from the Institute for Supply Management next week.
S&P 500: 1,102 (down 0.09% for the week and down 1.17% on the year)
NASDAQ: 2,255 (down 0.75% for the week and down 0.62% on the year)
Dow: 10,466 (up 0.40% for the week and up 0.36% on the year)
US Treasury 10 yr: 2.91% (from 2.95% last week)
Crude Oil (September): $78.95 (from $78.98 last week)
Gold (December): $1,183 (from $1,188 last week)
USD/Euro: $1.3052 (from $1.2823 last week)
THIS WEEK
It will be a busy week on the data front, allowing investors another round of monthly information with which to assess the recovery. Personal income, consumer spending, factory orders, motor vehicle sales, ISM manufacturing and non-manufacturing and the all important monthly jobs report will be issued. If these indicators are positive, investors could feel more confident. Negative numbers will only reinforce concerns about economic weakness. Earnings continue: Pfizer, Dow Chemical, Mastercard, Proctor and Gamble, Time Warner, Allstate and Kraft are some of the companies reporting.
COMMENTARY
Destination Detour
Americans are an impatient lot. We want the crisis and its aftermath over, now – not later. We are used to a fast paced society that provides answers that are only a click away. The recovery has everyone worried. Why is it taking so long?
A few reminders might help us get a little perspective.
According to Carmen Rinehart and Kenneth Rogoff in This Time is Different: Eight Centuries of Financial Folly, recoveries from recent major (systemic) banking crises are protracted affairs, with three characteristics. (Italics)
1. Burst bubbles take a long time to re-inflate. Stocks decline an average of 56% over a three and a half year period while housing prices typically fall 35% over six years.
This means – if this crisis follows a predictable pattern – the bear market for equities and housing could linger a while longer.
2. Unemployment and output also fare poorly. Unemployment increases on average 7% over 4 years, while output typically drops more dramatically – 9%, but over a shorter time frame, roughly 2 years.
During the aftermath of crises, the economy changes. Many unemployed workers cannot find jobs in their former fields, at least not initially. Businesses, which need to feel confident about the future before they will hire, can take a long time to add to their staff. But the economy can and does grow, perhaps modestly, over time and eventually many of the unemployed can be successfully absorbed into the job market. It is just that the timetable is in years, not months.
3. Government debt explodes, often by as much as 86%, as governments suffer from falling tax revenues and increased expenses, including rising interest rates on sovereign debt.
It takes a long time to unwind public debt, especially when the unwinding is painful and politically unpopular. However, the longer the excess debt stays on the books, the more likely another major crisis can occur. While interest rates remain low for now, the U.S. cannot afford to postpone tackling the federal deficit for too long.
Data from past crises tells us that the economic doldrums are likely going to be around for quite a while. In and of itself, a protracted recovery is not necessarily a terrible thing, as long as we can adjust our expectations. Eventually, if we develop sound policies, the U.S. can recover and the next boom cycle will appear.
For now, however, most Americans are worried. We lack the confidence that comes from understanding history. Without confidence, there is no patience. And without patience, there is frustration and anger.
“Are we there yet?” We chorus repeatedly from the back seat, as we watch the dizzying economic scenery fly by. “Of course not,” history retorts, sitting in the front seat. “The journey of our economic recovery has just begun.”
Buckle your seat belts and sit back. If history can be our guide, this ride may not be easy and it won’t be fast. We are taking a detour, but there is a destination waiting.
Tune in to News Talk 630 WPRO and 99.7 FM daily for our "Making Money Updates". Get the latest market news and our take on the day's events with our market commentary at 8:10am and 5:32pm. For more information, visit www.StrategicPoint.com.
*Past performance is not indicative of future results. Indices are unmanaged and you cannot directly invest in them. The Nasdaq Composite Index measures all NASDAQ U.S. and non-U.S. based common stocks listed on the Nasdaq Stock Market. The S&P 500 index is based on the average performance of 500 industrial stocks monitored by Standard and Poor’s. The data referred to above was taken from sources believed to be reliable. StrategicPoint Investment Advisors has not verified such data and no representation or warranty, expressed or implied, is made by StrategicPoint Investment Advisors.
Visit the weekly eNews archive
|