Financial Market Update
StrategicPoint of View®
July 26, 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 National Association of Home Builders reported a housing market index on future conditions as the weakest since March of 2009 (14, down 8 points from the recovery high of 22). Housing Starts, the most closely followed report on the housing sector, sank to 0.549M units, below the 0.580M units expected, a decline of 5.8% on a year over year basis. Existing Home Sales fell in June but not as much as expected, down 5.1 percent to a 5.37 million annual rate. Prices were positive in the report, up 5.2 percent for the median price to $183,700. Supply, however, was negative, up to 8.9 months from 8.3 months inventory. Leading Economic Indicators were negative, falling 0.2% in June.
S&P 500: 1,103 (up 3.57% for the week and down 1.08% on the year)
NASDAQ: 2,269 (up 4.13% for the week and flat on the year)
Dow: 10,424 (up 3.23% for the week and flat on the year)
US Treasury 10 yr: 2.95% (from 2.93% last week)
Crude Oil (September): $78.98 (from $75.84 last week)
Gold (August): $1,188 (from $1,188 last week)
USD/Euro: $1.2823 (from $1.2931 last week)
THIS WEEK
New-home sales on Tuesday provide the last piece to this past month’s housing puzzle; consumer confidence and sentiment weigh in on consumers’ views; durable goods orders, the Beige Book and Chicago PMI reflect business activity. On deck for earnings: DuPont, WellPoint, General Dynamics, Boeing, Visa, Raytheon, Motorola, Amgen, MetLife, Merck and Chevron.
COMMENTARY
Investor Multitasking
Just when you thought the cloud of negative indicators was going to consume the markets, we had a week like last week, where investors reacted benignly to struggling economic data and pushed their attention over to the earnings arena. Mind you, company profits are not a bad place to focus on. After all, in the long run the stock market is about company performance, and performance is dependent on earnings.
So far this season, earnings have not disappointed. 75% of companies reporting have beaten expectations, creating a condition where the rising “E” in the price to earnings ratio (P/E) causes the overall P/E to fall (if prices hold steady), making stock valuations more attractive. In a way, this past week’s stock prices were simply catching up with the company reports.
But sometimes it seems as though the markets can’t multitask. Case in point: How many windows were actually opened at the bottom of investors’ computer screens this past week? Yes, it seemed that we could click the task bar to focus on wonderful Apple and Microsoft earnings or GE’s dividend announcement (up 20%) on Friday or open the European stress test results window (which provided some reassurance that European bank balance sheets are manageable). But the window to Ben Bernanke’s mid week commentary on the “unusually uncertain” economic outlook was closed and forgotten by Thursday, and the housing market and leading indicators’ windows were no where to be seen.
We’ll focus on housing, which is important as an indicator of future economic growth. This past week we had three data reports: National Association of Home Builders’ housing market (conditions) index, housing starts and existing home sales. All declined, painting a disappointing view of the housing outlook. (see “LAST WEEK” above).
Why do we care? After all, many investors have already factored in a very slow recovery in housing price increases and home purchases. However, housing indicators are meaningful because they can create a ripple effect.
Housing starts provide new employment and secure profits for the builders; housing sales can spill over into the purchase of furniture and appliances, once the realtor and mortgage lender are paid and the new home owners move in. Builders purchase permits when they expect consumers to buy homes, and people buy houses when they feel confident that they can afford them. Once the ball gets rolling, there is a multiplier effect, which can speak well for a recovery and your investments. However, what the housing data showed us this past week is that we are still waiting for this good news to unfold.
When investors don’t multi-task (either during rallies or declines), which requires focusing on many data points, market prices can exaggerate the upside or magnify the downside. This means that, once quarterly company earnings news dies down and the economic data resumes its front and center position, the pessimists may temporarily recapture market sentiment.
Both the optimists and the pessimists need to open more windows at the bottom of their computer screens and keep them open while they formulate their strategies. Multitasking could be a simple recipe for helping to reduce market volatility.
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.
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