Financial Market UpdateStrategicPoint of View®
July 19, 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
Retail sales off 0.5% (-0.1% ex-auto); new jobless claims at 429,000 from 454,000; PPI down 0.5% (core up 0.1%); industrial production up 0.1%; CPI off 0.1% (core up 0.2%) and early July consumer sentiment at 66.5, down sharply from 76. The Small Business Optimism Index fell from 92.2 to 89 after two months of improvement. In the minutes of June’s Federal Reserve meeting, the Fed downgraded its outlook for the economy and debated further stimulus if the economy continues to slow. Earnings season began on a positive note with Alcoa and ended the week with a lackluster report from GE, with banking stocks giving cause to worry in between.
S&P 500:1065 (down 1.21% for the week and down 4.48% on the year)
Dow: 10,098 (down 0.98% for the week and down 3.16% on the year)
NASDAQ: 2179 (down 0.77% for the week and down 3.97% on the year)
US Treasury 10 yr: 2.93% (from 3.06% last week)
Crude Oil (August): $75.84 (from $76.09 last week)
Gold (August): $1,188 (from $1,209 last week)
USD/Euro: $1.2931 (from $1.2634 last week)
THIS WEEK
Economic data focuses on housing (homebuilders index, housing starts and existing home sales) – all of which are expected to decline. Earnings could provide some upbeat news to counter balance the wilting economic indicators, as we move away from domination of the banking sector and onto industrials, technology, consumer staples and healthcare. IBM, Ford, Coca Cola, Abbott Labs, EMC, UPS, Amazon, 3M, JNJ, Microsoft, Verizon, Goldman Sachs and Wells Fargo are among those reporting.
COMMENTARY
Confidence is King
All the King’s data and all the King’s earnings couldn’t put the markets together again this past week. Without confidence, there is no King.
One would have thought that the closure on FinReg, the successful BP temporary cap on the oil spill and the SEC settlement with Goldman Sachs would have calmed investor nerves. But weak retail sales, as well as regional activity reports, plus inflation numbers that continue to invite concerns over deflation did not tempt traders. In addition, earnings season, which started off strong with Alcoa’s and Intel’s numbers, disappointed later in the week when the big banks (J.P. Morgan Chase, Citi and B of A) confessed to weaker trading profits and double digit declines for net interest on loans. The big banks went on to predict dire outcomes resulting from FinReg, although we find this a bit overdone.
On Friday the consumer caved. The early July reading of the University of Michigan’s consumer sentiment index fell a dramatic 9.5 points. A decline of this magnitude has only been seen seven times since reporting began in 1946. Most declines of 9.5% or greater have been associated with major events such as 9/11, Kuwait invading Iraq, Katrina and the demise of Lehman Brothers. This month’s decline is attributed to general anxiety and mistrust of Wall Street, Washington and the media as well as concern over the jobs’ market and personal income.
The survey interviews 500 individuals monthly, asking questions on personal financial conditions and expectations for interest rates, inflation and jobs over the next one to five years. While the survey is a poor prognosticator of consumer spending (this may seem counterintuitive), it does tend to be a relatively decent indicator of a turning economy, especially to the downside. That is why markets pay attention.
At the end of the day a lack of confidence inspires the holding of cash, not the spending of cash. For consumers, this means lackluster returns at the bank or the paying down of debt balances. For businesses, it is a “wait and see” game. Of the 419 non-financial companies within the S&P 500, 168 corporations are sitting on more than $1B in cash or cash equivalents; 16 firms have over $10B in cash ready to be deployed.
The recovery is dependent on spending. If businesses and consumers aren’t confident enough to shell out their dollars, we could get stuck bumping along the bottom of this business cycle for quite some time. If, on the other hand, the next two weeks of earnings reports show businesses beginning to spend their cash, confidence in the markets could return.
* * * * *
PBS’ Washington Week in Review on last Friday offered some interesting commentary on the baby boomers. Studies show that the idealists and optimists from the 1970s are now suffering the most pessimism and depression from the market crash. This is not surprising.
The young were (and are) caught in the unemployment cycle, but they have their lives ahead of them to save, invest and develop their careers. The elderly have social security, pensions and portfolios that were predominantly in fixed income at the time of the crash. They often live very modest lifestyles, and, therefore, are less likely to have experienced significant changes to their well being.
But the baby boomers have seen their retirement savings slashed and their best laid plans jettisoned. Indulgence was a way of life for so long that it has been hard to abandon. Where have all the flowers gone?
Some of us are baby boomers and we remember the 1970s and early 1980’s. If we were paying any attention back then (for some of our generation that was questionable), we might have noticed that the stock market suffered major booms and busts of the magnitude we have seen in this current bear market and that, back then, the economy endured two very deep recessions. Many of our parents’ generation bailed out of stocks entirely in the long performance drought. But as baby boomers we were young and our optimism served us well, motivating us to work hard and prosper for four decades - before we were humbled by overconfidence.There it is again - confidence. Sometimes there is too little confidence; sometimes there is too much. Right now there is too little. Long live the King! And Generation Y, the new generation of optimists of this bear market.
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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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