Financial Market Update
StrategicPoint of View®
May 17, 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
Data was thin last week but it was all positive. The trade balance showed an increase of both exports and imports, indicating that global trade activity (and therefore global growth) is increasing. Retail sales were far higher than expected (up 0.4%), industrial production was up 0.8% and consumer sentiment continued approving.
S&P 500: 1136 (up 6.32% for the week and up 1.88% on the year)
Dow: 10,620 (up% for the week and up 1.84% on the year)
NASDAQ: 2347 (up% for the week and up 3.44% on the year)
10-year: 3.45% (from 3.81% last week)
Crude Oil (June): $71.84 (from $75.14 last week)
Gold (June): $1,230 (from $1,210 last week)
USD/Euro: $1.2364 (from $1.2753 last week)
THIS WEEK
It is a somewhat heftier week for economic data. Home builders weigh in along with inflation (PPI and CPI), jobless claims and leading indicators. We are getting to the point where good news is expected. As a result any negative surprises could have an outsized effect in the domestic markets.
COMMENTARY
Investors need eyes on opposite sides of their heads, if they want to avoid being whipsawed by the US/European split outlooks. Recent high volatility leaves the impression that investors first focus in one direction and then the other. Europe presents serious risks to our economic growth (stocks fall), but the US recovery is ahead of expectations and the supporting data keeps getting better (stocks rise). Ours is a global economy requiring vigilance on both sides of the pond. But until investors get a handle on exactly how Europe’s troubles are going to affect us, they will likely continue to dance between positive and negative outlooks.
First the good news: the US recovery. Consumers and manufacturers have stepped up their spending and production while businesses are adding to investments in their own companies. This week’s numbers showed that retail sales are on target for 3% GDP (Gross Domestic Product) while industrial production jumped a hefty 0.8%. In addition, many corporations (ex-financials) are sitting on piles of cash and strong balance sheets, having trimmed their costs dramatically during the recession and curtailed their spending. Credit Suisse recently described corporate cash as “blubber on a seal: protecting the animal during the harshness of winter.” Now that the recession/hibernation is over, this cash is ready to be spent.
However, our economy is not entirely out of the woods yet. The housing market may or may not have turned a corner and inventory rebuilding, a temporary effect of any recovery, is still a major part of growth. Once the government stimulus program concludes, consumers and businesses will have to spend even more to sustain the expected moderate growth of 3%. A reasonable, but lack luster, recovery leaves the U.S. vulnerable to after-shocks.
And here is where Europe steps in as the unknown. Two weeks ago, in this newsletter, we talked about the contagion effect of the sovereign debt crisis. Last week we discussed a potential credit crisis looming in European banking community. This week we will focus on Europe’s potential impact on longer term U.S. economic growth.
Key to global growth is trade. A global recovery is dependent on exports and imports and countries need both. The cost of imports and exports is tied to currency pricing. Falling currency values make exports less expensive and more attractive to buy. Rising currencies do the opposite. This means that as our dollar rises, our exports become more expensive to overseas purchasers. They buy less and our growth declines.
On Friday the euro slumped below $1.24, a four year low, and is likely to fall further, given that the European Central Bank has agreed to accept sovereign loans from troubled countries. If the rescue package doesn’t work, the euro loses credibility and continues its decline. If the European austerity measures do work, European consumers will have less to spend on our goods. Either way we have something to lose. How much we lose depends on trade with our other, stronger partners: Canada, Mexico, China and Japan as well as other developing nations.
Growth is a longer term issue. But in the interim Europe’s problems are magnified by personalities and rumors that feed into media frenzy. Riots and protests by irate pensioners? We will give you those courtesy of Greece. Dramatic fist pounding and arm twisting? French President Nicolas Sarkozy will oblige as he bullies a reluctant Germany into approving the EU bailout bill. Nasty rumors? Take the doozy that France’s debt is about to be downgraded (no factual basis behind this provided). France has never been accused as being one of the PIIGS; it is supposed to be one of the stronger economies in Europe. Add in analysts who publicly worry that Greece is going to default no matter what, and, well, the European contagion doesn’t need bad loans to spread.
Media spotlight aside, the debt crisis in Europe remains very serious, both in the short term resulting from liquidity and currency fears, and in the long term based on concerns over declining growth.
Whither the markets from here? Market strategists will agree that it is very common for the markets to revisit their lows after a major spike. What is important is how the markets act after the re-visitation. From there we will learn if the cyclical bull market, wrapped in a secular bear market, has ended or whether the markets still are able to achieve upward momentum from here.
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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