Financial Market UpdateStrategicPoint of View®
May 24, 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 Consumer Price Index (inflation) was more than tame – it was downright lifeless, falling 0.1%. The leading indicators (a harbinger of things to come) stalled in April (down 0.1%) hinting that the recovery could run out of steam earlier than expected. But the big market mover was last week’s jobless claims. In our previous e-mail, we noted that any negative surprises could have an outsized effect in the domestic markets. That proved true when a 25,000 increase in claims on Thursday contributed to the 4% equity slide.
S&P 500: 1,087 (down 4.23% for the week and down 2.51% on the year)
Dow: 10,193 (down 4.02% for the week and down 2.25% on the year)
NASDAQ: 2,229 (down 4.99% for the week and down 1.76% on the year)
10-year: 3.20% (from 3.45% last week)
Crude Oil (July): $70.04 (from $71.84 last week)
Gold (June): $1,177 (from $1,230 last week)
USD/Euro: $1.2570 (from $1.2364 last week)
THIS WEEK
Major reports for the week include: home sales and prices, durable goods orders, jobless claims, consumer spending and personal income. The April housing data will be the most closely watched, given the soon to expire homebuyer’s credit. Once again, data that misses expectations could spook the markets.
COMMENTARY
Corrections come as surprises, even when they are predicted for months and months. The numbing 3.9% drop in the S&P on Thursday was no exception. We like to say, “Markets go up (down) - until they don’t.” It’s the inflection points that are hard to get right.
Momentum drives markets. Investments flow like water in the direction of least resistance. After a storm, debris can build up and the water is diverted in a new direction. This is what we have been seeing for the last few weeks.
The storm may be Europe, but the debris has been formed by investors unwinding the “pro-growth” trade. Hedge funds, large institutions and a myriad of black box computers have followed the strong global recovery theory over the last year and placed bets in riskier assets: stocks, commodities, high yield bonds, certain currencies, etc. These assets soared, helped by low interest rates that could be leveraged into high yielding returns.
The pro-growth theory was dominant as long as economic data kept improving and governments continued to back financial institutions. Emerging markets were the darling. The US was headed for a slightly softened V shaped recovery and Europe was holding its own.
Governments around the world propped up the banks, provided low interest rates to corporations and tried to keep consumers trolling the malls and dining out. As a result, corporations shored up their balance sheets, trimmed their inventories and got in line for the rebound. The only outstanding piece of the puzzle was the level of future increased demand, which would determine the recovery’s sustainability.
With Europe now weakened by debt and austerity measures, China employing money-tightening policies to slow growth and US exports becoming more expensive with the rise of the dollar, investors have cut their estimates on future economic growth. This has resulted in prices of riskier assets appearing overvalued. Hence the pullback.
With the risk trade coming off the table, the markets are likely to experience a period of reassessment. So far there has been a flight to safety, but safety doesn’t pay much in the long run, leaving investors searching for the next momentum trade. This could lead to a narrowing of focus – such as on particular countries, sectors and holdings that could outperform. In this environment, stock pickers and actively managed funds should have an advantage.
For the immediate future, market uncertainty means volatility through indecision. We feel there has been a change in investor sentiment that needs a while to sort itself out, as investors evaluate how much global growth is being erased. As a result, markets could go lower before they regain their footing. However, we are not anticipating a market collapse. Strong corporate balance sheets and profit margins, especially on this side of the Atlantic, should help to fortify any near term bottom.
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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