Financial Market UpdateStrategicPoint of View®
May 31, 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
One disappointment was the downward revision to Q1 GDP. Although only a decline of 0.2% to 3% growth in the first quarter, the revision confirms that we are caught in a weak post recession recovery. Housing data was predictably strong going into the final stretch of the homebuyer’s credit. Consumers made more money last month (income up 0.4%), but chose to save it (savings rate 3.6%) rather than spend it (spending was flat). Overall, consumer confidence rose.
S&P 500: 1,089 (up 0.18% for the week and down 2.33% on the year)
Dow: 10,137 (down 0.55% for the week and down 2.79% on the year)
NASDAQ: 2257 (up 1.26% for the week and down 0.53% on the year)
10-year: 3.30% (from 3.20% last week)
Crude Oil (July): $74.09 (from $70.04 last week)
Gold (June): $1,212 (from $1,177 last week)
USD/Euro: $1.2271 (from $1.2570 last week)
THIS WEEK
This may be the week where attention is focused back to the United States. On Tuesday we get the Institute for Supply Management’s manufacturing data and Commerce Department’s construction spending, which should tell us how strong economic activity is. The consensus forecast is for a decline in activity, although later in the week factory orders are expected to rise. The big number will be on Friday – non-farm payrolls (jobs and unemployment). The economy is expected to have added 508,000 jobs in April – that is 218,000 more than March.
COMMENTARY
‘Volatility by indecision’ worked wonders this past week. However, given how hard it is to predict anything in the markets now-a-days, our last Monday’s e-mail forecast of heavy intraday gyrations was hardly a coup.
Distraction is the name of the game. Thursday’s announcement by the People’s Bank of China that the country was committed to long term investment in Europe sent the markets soaring. We have to ask – what else could they have said? Whether or not China is committed to holding and buying European sovereign debt is not a topic anyone wants in the rumor mill.
Friday, sentiment turned negative when Fitch Ratings downgraded Spain’s triple-A credit rating to AA+. Again we ask: couldn’t the markets have seen that one coming? Spain’s real estate bubble and debt refinancing problems are hardly a new revelation. Friday’s downdraft was also influenced by the non-event of traders taking risk off the table before packing their bags for the holiday weekend. Who wants to be long over a long weekend?
Distracted or not, traders made May a terrible month for investing – markets were down 8%, the worst performance since 1940.
One issue that underlies all the distractions is China. Its economy is tied closely to ours:
• First, through its currency being pegged to the dollar
• Secondly, through its role as a major creditor for our debt
• Thirdly, as a leading importer of our exports and as a supplier of products and goods to our businesses and consumers.
China is also relatively new to economic manipulation through active fiscal and monetary policies. Its economy may be the darling of the global recovery with 12-14% growth. However, lately the country has been concentrating on slowing bank lending in order to stave off high inflation and dampen its real estate property bubble. The efforts are laudable, and if they work the Chinese will prove themselves much more adept at managing excesses than we have been. But if, as sometimes happens, monetary policy changes have unintended consequences, China could suffer some form of reversal that could have a significant impact on our economy.
Bottom line: Europe and China will have a longer term influence on how strong our recovery will be. Company profits will benefit or suffer depending on the ultimate strength of economic global growth. Earnings, in turn, will be affected. And stock prices will reflect these earnings. The forward price/earnings ratio for the S&P is currently estimated at around 12, below long term averages, indicating a buying opportunity. But if global growth declines, earnings expectations could fall, sending P/E ratios higher, and making stocks less attractive.
It may take a while longer for the markets to sort out the impact of Europe, China, the stability of the global credit markets and the unraveling of the pro-growth trade (all topics discussed in this or previous Monday e-mails). Until quantified, the risks can appear more frightening than they might deserve, leaving perception driving market prices.
It is still too early to call this correction a 12% pullback (meaning we have already hit bottom) or a 20+% bear market (which would leave us vulnerable to the downside). Until a consensus is reached, distractions can keep everyone awfully busy.
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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