Financial Market Update
StrategicPoint of View®
February 16, 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
On the economic front, January retail sales rose 0.5%, with year-over-year figures jumping a comfortable 4.7%. Business inventories declined, leaving room for increased production in the future. New jobless claims witnessed a welcomed 43,000 decrease. Rounding out the good news were local stocks Hasbro and CVS, which posted better than expected profits, and brought a bit of cheer to the area. On the negative side: the U.S. trade deficit widened and consumer sentiment slipped.
S&P 500: 1076 (up 0.94% for the week and down 3.5% on the year)
Dow: 10,097 (up 0.85% for the week and down 3.17% on the year)
NASDAQ: 2141 (up2.01% for the week and down 3.75% on the year)
10-year: 3.68% (from 3.54% last week)
Crude Oil (February): $73.58 (from $71.19 last week)
Gold (February): $1,090 (from $1,052 last week)
USD/Euro: $1.3636 (from $1.3683 last week)
THIS WEEK
The Fed releases the minutes from its January meeting, providing more detail on the Central Bank’s outlook. An inflation watch will be in effect with the announcement of PPI and CPI figures. Housing starts, industrial production and capacity utilization will guide us in our assessment of the recovery. Hewlett Packard, Merck and Quest report.
COMMENTARY
The news from overseas drove the markets again this week, with the U.S. looking better and better in comparison to our cross-Atlantic neighbors.
“Buy on the rumor,” investors chanted, as they tried to sort out the implications of a potential default by Greece on its sovereign debt. That attitude sent the markets up on Tuesday prior to the European Union summit scheduled for later in the week. Since there may be no good possible outcomes to the Euro crisis, the European Union Thursday chose the middle ground – or as we call it – the muddle ground.
When the grand plan was unveiled, the European Union carefully avoided the words ‘bailout’ and ‘rescue.’ There were indications of increased monitoring by the International Monetary Fund; Germany and other countries expressed a readiness to step in and help out, but no loan guarantees or cash infusions were promised. Going forward it seems clear that the EU may have to initiate further regulation and rules. In the interim, count on a bit of vagueness, the voicing of some well meant new standards of behavior and quite a lot of squawking, as citizens of Greece and other debt laden countries voice their opposition to any new stringency.
Vagueness does not mean demise. A unified Europe – a long time goal for many EU countries – will not be readily abandoned as a result of a lack of responsibility from some of the members. But it may be a bit messy for a while.
Meanwhile, fourth quarter Gross Domestic Product numbers for the European Union were released on Friday, and they weren’t reassuring. Europe expanded a mere 0.1% in the fourth quarter. By way of comparison, the U.S. grew 5.7% (albeit some of that growth being attributed to one time gains). The question has to be asked: is Europe poised for recovery, stalled or heading backwards?
There are two major implications of European weakness. Economic stimulus is likely to continue, which will not help the sovereign debt challenge. And demand for imports (our exports) may fall short of expectations. Taken together, the outlook for European markets remains unfavorable in the near term and could spill over to the US.
On the other side of the globe, for the second month in a row, a burgeoning China announced an increase in reserve requirements for banks. The half a point hike, which will drain about 300 billion yuan out of the system, is designed to remove excess liquidity and put a lid on the overheating economy. In spite of this pro-active measure to control inflation and growth, China’s GDP is still expected in the double digits in 2010. The markets, which fear even that large a growth rate might not be good enough, have punished Chinese stocks (as exemplified by ETF FXI) by 15.50% since November.
The good news is that for now the US is not the center of finger pointing. Although we, too, have massive deficits to worry about, we are currently providing relative stability, as evidenced by the rise in the dollar.
But our gain doesn’t stop investors from getting the jitters. A strong economic recovery may have been baked into last year’s stock market numbers. While we believe that the stock market could end up this year, our view of the trajectory has changed slightly.
Traders, with their “sell on the rumor” mentality, appear to be all too ready to discount future bad news. Worries about Europe, China, jobs, and the Federal Reserve have been the focus of investor attention for the last month. Less noticed, economic data is gradually improving. If the markets continue to move sideways or slightly lower in the near term, modest but stronger economic and company data could catch up with the numbers, making P.E.s more attractive as the year progresses.
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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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