Financial Market UpdateStrategicPoint of View®August 30, 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
Volatility remained the buzzword of the week, as investors on Thursday saw the Dow close below the 10,000 mark for the first time since July 6th. The markets traded lower all week, and if not for Friday’s 165 point rally in the Dow, they would have finished down over 2%. Pundits and investors alike were left scratching their heads to explain Friday’s rally. GDP was revised lower, and Ben Bernanke hadn’t shed any real light on the Fed’s outlook during his speech from Jackson Hole, WY. While Bernanke did affirm that he will act if “unexpected developments” threaten the recovery, it’s difficult to think that the markets rallied on a fact that was already well known by investors. Perhaps they believed the GDP revision was going to be much worse than what we saw, or maybe money managers were repositioning their portfolios prior to the end of the month. Whatever the cause, Friday’s rally could be short-lived if this week’s economic data does not turn the tide of recent weaker-than-expected releases.
S&P 500: 1,065 (down 0.66% for the week and down 4.53% on the year)
NASDAQ: 2,153 (down 1.20% for the week and down 5.09% on the year)
Dow: 10,151 (down 0.62% for the week and down 2.66% on the year)
US Treasury 10 yr: 2.65% (from 2.61% last week)
Crude Oil (September): $75.17 (from $73.46 last week)
Gold (December): $1,238 (from $1,228 last week)
USD/Euro: $1.2762 (from $1.2705 last week)
THIS WEEK
It’s going to be difficult for many on Wall Street to stretch the three-day Labor Day weekend into a four or five day respite, as Friday’s Jobs number looms large. The market could really use a positive surprise on Friday to help kick off September, which is traditionally a rocky month for equities. Tuesday will also be a busy day, as the Consumer Confidence numbers come out in the morning, and in the afternoon the FOMC minutes from their last meeting are released. The minutes will be particularly interesting as there seems to be growing disagreement on the Fed’s own outlook on the economy and thus what their next move will be. Both data releases will more than likely move the markets, but probably not to the extent of Friday’s Jobs number.
COMMENTARY
Many of us who have lived in Rhode Island for quite some time probably had the privilege, or perhaps dubious honor, of taking many trips over the old Jamestown Bridge. Opening in 1940, the Jamestown Bridge was the longest bridge in New England (until the Tobin Bridge opened 10 years later). Recall the later years of that bridge and you will remember a rickety, two-lane bridge that seemed like you were risking your life every time you decided to travel over it. If driving at high speeds mere inches away from cars doing the same in the opposite direction wasn’t enough to scare you, perhaps the steep grade of the bridge, or the slippery gate at the top would do the trick. We’d always hope that the ride over it would be quick and uneventful. However, the trip always seemed to take longer than it should. And let’s not forget the traffic jams.
We probably all have stories about being stuck on that bridge, especially in the summer months, waiting to reach Jamestown. Adding to our concern about the foundation and stability of the bridge was that our idle cars would shake, as motorists going the other way would zoom by us at high speeds. When you mix in the height of the bridge, the swaying of you car and questions about the foundation that supports the road, it’s no wonder many swore off visiting Newport!
Many investors found themselves with a similar dilemma this week. They found themselves at a height, in terms of equity prices, that made them uncomfortable, and they were looking towards the economic data for solace. Instead, they found oil inventories higher than expected and demand weakening, evidence that more and more of us are choosing to stay home. They saw a disappointing durable goods report which seemed to intimate that businesses may be pausing their investments in new equipment. When they looked to the consumer for some silver lining, what they saw was the lowest existing home sales number in 15 years, well below expectations. Fueling the concern surrounding the weak home sales number was that no one seemed to have an explanation for the precipitous drop.
Finally they looked to Friday’s GDP report for any signs of positive news.
What they got was a second quarter GDP Report that came in at almost half of the original estimate. Early on Friday the market began to sell off, fast and furious. Investors felt like they were at the top of the bridge, peering over the edge of an abyss. Questions were swirling about the foundation of this economic recovery and the stability of the market. Cars were flying by faster than ever and the car began to shake. Just about when they felt like they were going to be sick, and they wanted to start selling any and all equities, the car started to move. The descent from the height of concern began to wane, and the trip’s end was finally in sight.
Perhaps it's the ultra-pessimism that seems to permeate the emotions of many investors. Perhaps it's an end of the summer rally, which many have been calling for. Perhaps it's the belief that the Fed will ride in on a white horse and save the day, or at least the market. Or perhaps the old Wall Street axiom "the news is always the worst at the bottom", a takeoff on the old proverb "it's always darkest before the dawn", that led us higher on Friday. Whatever the reason for the stop in the sell off, and the subsequent 165 point rally in the Dow on Friday, we're just thankful that the foundation held.
We all know what happened with that old Jamestown Bridge. It took some time for the new one to be built, but the old bridge stood firm and did its job until the every end. Scary thoughts that the foundation would crumble did not come to pass. For investors, weary that the economic recovery will not survive, perhaps thinking of that old bridge would provide some perspective. In the end a new bridge was built, stronger and safer than ever.
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*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.
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