Financial Market Update
StrategicPoint of View®
July 12, 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
The service industry slid a bit, as the ISM non-manufacturing index slipped from 55.4% to 54.5%, still in expansionist mode. Jobless claims were down modestly, consumer credit declined and wholesale inventories were up. It was a week for calming nerves, as a couple of companies provided good news and Europe soothed worries by reassuring investors that it can cope with austerity and would be more open about upcoming bank stress tests.
S&P 500: 1078 (up 5.38% for the week and down 3.32% on the year)
Dow: 10,198 (up 5.29% for the week and down 2.21% on the year)
NASDAQ: 2196 (up 4.97% for the week and down 3.22% on the year)
US Treasury 10 yr: 3.06% (from 2.96% last week)
Crude Oil (August): $76.09 (from $72.24 last week)
Gold (August): $1,209 (from $1,212 last week)
USD/Euro: $1.2634 (from $1.2541 last week)
THIS WEEK
Earnings, earnings, earnings. Alcoa starts off the season on Monday evening, followed by Intel on Tuesday, JP Morgan Chase and Google on Thursday, and Citigroup, Bank of America and GE on Friday. Add to that schedule: retail sales, the producer and consumer price indices, consumer sentiment and industrial production, and the markets have an awful lot to digest this week.
COMMENTARY
The Seductiveness of Volatility
What is more exciting than the seductiveness of volatility? Apparently not much nowadays. Imagine that you could find an activity that would elicit a greater stomach reaction (other than the over-used rollercoaster metaphor) than a 5.01% drop in the S&P one week, followed by a 5.38% increase in those same equity prices the next week.
That is a total move of over 10%. The fact that the two week period ended with only a 0.1% change didn’t take away from the agony and thrill of the ride. We are thankful that vacation distracted many folks from watching the ticker-tape.
Earnings
Earnings season is again upon us, and we suspect that this week’s market strength was based a bit on “buy on the rumor” sentiment. On Wednesday custodial bank State Street Corporation forecast second quarter operating earnings that far exceeded estimates. If State Street can do it, investors mused, why not everyone else? Everyone else begins reporting this week.
Prior to last week, the assumptions on earnings were that cautious consumers, tough year over year comparisons and the rise of the dollar could negatively affect profits. However, pre-season profit warnings from companies have been slim, leading some analysts to believe companies will surprise on the upside. S&P Profit growth is expected to increase 27% from a year ago and earnings are estimated to increase 9%. But whether companies have confidence on future revenue growth is a big question. In other words, investors had little more than rumors to rely on this past week.
The corollary to “buy on the rumor,” of course is, “sell on the news.” If the allure of volatility continues, it could be an interesting three weeks.
Popularity of Nihilists and Pollyannas
Jason Zweig, in this past weekend’s WSJ Intelligent Investor column commented on the popularity of extreme prognosticators. Apparently, according to Zweig, a majority of people find extreme stock market predictions more convincing than moderate forecasts. Why? The assumption is that if one is willing to go way out on a limb, that person must be really convinced of his/her convictions, and therefore quite possibly correct. Those with moderate views are deemed to be a bit more wishy-washy and, therefore, less convincing.
As an example, Zweig uses Robert Prechter’s (President, Elliot Wave International) prediction, which has been circulating this week that the Dow Jones Industrial Average will fall below 1000 within the next six years. We saw this article too. But, rather than be alarmed, we came to the same conclusion as Zweig. The likelihood of those with extreme views being right on a particular prediction is very small.
While we now know that Black Swans (those highly unexpected events whose risks are all too often discounted or ignored) are certainly more possible than previously thought, these events are hard to know in advance and don’t tend to follow historic patterns or trends. They can, and quite possibly will, happen again. But how, when, where and why is not yet known.
What is important for investing is risk management. Investors should be very aware of the risks to their portfolios and should diversify across different risk scenarios. However, nihilists or Pollyannas should not be their sole guide. While the extreme prognosticators provide engaging reading and food for thought, but they are often being paid to be newsworthy not to be right.
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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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