Muddle through – to achieve a certain degree of success but without much skill, polish, experience, or direction. (www.dictionary.com)
Last week featured some tame economic and earnings news as the economy has hit a soft patch. However, investors have shifted their attention on the increasing possibility of additional monetary policy action, both at home and abroad. For the week the Dow was up 2.0 percent; the S&P 500, up 1.7 percent; the Nasdaq, up 1.1 percent; the Russell 2000, up 0.6 percent.
The recovery lost steam in the second quarter. GDP growth decelerated to 1.5% annualized from 2.0% in the first quarter. This Friday is an update on the US employment situation. Current consensus has the US economy adding 100,000 jobs.
Progress continues in the housing sector as home prices have experienced 4 months in a row of gains. The FHFA home price index in May increased 0.8 percent, following a 0.7 percent boost in April. The year-on-year rate is up 3.7 percent. Tuesday we’ll get more housing data from the S&P/Case-Shiller home price index.
The muddle through continues…
“When everything seems to be going against you, remember that the airplane takes off against the wind, not with it.”
- Henry Ford
Market average moved higher last week on reasonable earnings reports and hopes of an eventual Fed intervention (stimulus). Europe, however, brought everybody back to reality.
Sovereign yields in Europe are soaring on renewed fears that Spain may need a formal bailout from the European Central Bank. The 10-year Spanish bond yield rose to 7.5% … a very costly level to fund debt (compared to U.S. 10-year yields of 1.42%). Of course, the fear is that Italy and France may be next (never-mind Greece and Portugal).
Debate in Europe is raging over the creation of a central banking union as well as other mechanisms (deposit insurance chief among them) to strengthen the monetary union. Reform packages in Europe are getting harder and harder to implement with interest and unemployment moving quickly higher. European leaders continue to drag their feet, and the rest of the world is suffering as a result.
Meanwhile, back in the United States, second quarter earnings have been reasonable. Earnings have been mostly in-line with expectations, but top-line growth has been difficult to achieve. Perhaps U.S. companies have extracted as much as they can from operations … we expect to see profit margins narrowing as worldwide economic growth moderates. Fortunately, valuations, strong balance sheets, low interest rates and improving housing will likely keep U.S. markets range-bound. In the end, however, the U.S. cannot decouple from the rest of the world.
Investors should not be surprised by increased volatility.
“It is not the ship so much as the skillful sailing that assures the prosperous voyage.”
- George William Curtis
Last week the DJIA ended with a small gain thanks to a 204 point rally on Friday due to better than expected earnings from J P Morgan. This week look for a flood of earnings reports from major corporations such as Coca Cola, JNJ, IBM, GE, Microsoft and more as well as economic reports on CPI, industrial production and housing starts.
Retail sales were reported for June this morning and fell 0.5%.
This is the third straight month that retail sales have declined. The last time this occurred was in the second half of 2008. The decline was short of analysts’ expectations which were for an increase of 0.2%. April sales were revised to down 0.5% and May sales were minus 0.2%. Since retail sales account for two-thirds of the nation’s economic growth, unless the jobs picture and consumer sentiment improves it seems likely that the economy will continue to struggle.
“Life is like riding a bicycle. To keep your balance, you must keep moving.”
- Albert Einstein
Rarely have we seen economic numbers that so confound the optimists and the pessimists on the US economy. First, the negative. The ISM manufacturing number broke under 50 for the first time in many months and the ISM Services dropped to 52.1 as well. The new jobs created was just 80,000 for the month, well below what we need to reduce unemployment. Also consumer confidence data has been slipping for several months. But don’t be so glum-construction spending was up nicely(0.9%), factory orders were up 0.7%, new unemployment claims decreased to 374,000 and the average work week hours went up smartly to 34.5 hours, not bad at all.
Of course we don’t exist in a vacuum-many global forces influence our economy- slowdowns in Europe and China are of most immediate concern along with instability in the Middle East.
We are entering the typical time when corporations report their quarterly revenues and earnings. Wall Street analysts have been reducing their estimates and companies have cut their guidance.
Yet through all this uncertainty, year to date performance of US markets (S&P 500 up over 8%) is good. Equities do appear attractive relative to money markets and Treasury securities, particularly when investing in higher dividend payers. We are reminded of the need for patience and perspective in handling this daily barrage of data we face.
“He that can have Patience, can have what he will”
- Ben Franklin
Stocks bounced back last week as news from Europe spurred an S&P 500 rise of 2.5%, producing a rewarding 9.49% first half total return! Investors around the world seemed to gain confidence from Europe’s announced “growth package”, which was valued at 120 billion euros and is aimed at stabilizing European financial conditions [by increasing lending capacity]. In response, the Euro rallied at the dollar’s expense.
This week the unemployment rate will be announced Friday.
However, few other significant indicators will be released this week—a holiday shortened week marked by the New York Stock exchange closing early on Tuesday, not to be reopen until Thursday July 5th.
Happy Independence Day!
“Where liberty dwells, there is my country.”
“Everything that is really great and inspiring is created by the individual who can labor in freedom.”
“I believe in America because we have great dreams – and because we have the opportunity to make those dreams come true.”
–Wendell L. Wilkie
“There, I guess King George will be able to read that.”
On signing the American Declaration of Independence.