Weekly Update for August 13, 2012
After a very quiet summer week on Wall Street (half the traders must have been on vacation), markets closed up, consolidating the gains made since the June 4th low. Last week the S&P gained 1.07%, the Dow picked up 0.85%, and the Nasdaq gained 1.78%. Before getting into what transpired last week, let’s take a moment to reflect on how far we’ve come this year. The S&P has been positive eight weeks out of the last ten, has gained 11.79% for the year, and is up 25.44% since this time in 2011.[i] Despite a rocky second quarter and concerns about a double-dip recession, the markets are actually performing well. We know it can be hard to maintain composure when markets hit turbulence, but overall equity performance is getting better.[ii]
Federal Reserve Chairman Ben Bernanke started off Monday with reassurances that broad market measures are still pointing towards a recovery.[iii] While he didn’t discuss monetary policy, we can be sure he recognizes that the economy isn’t out of the woods yet and is still prepared to take action if needed. Though the week was light on economic news, jobless claims turned up lower than expected and our trade deficit narrowed, indicating that the economy is doing better, overall.[iv] Markets ticked up after his remarks, continuing their quiet rally.
Analysts have been surprised by the stealthy summer rally, as corporate revenues are down and economic fundamentals are still lukewarm. One explanation for why stocks are moving higher despite weak market internals is that traders expect Fed action next month. The downside to this is that if the Fed disappoints, equities could tumble. As we get closer to the end of the year, we can also expect additional media focus on the impending fiscal cliff, the expiration of tax cuts, and deep government spending cutbacks due to kick in January 1st; if the federal government doesn’t develop a plan, it could definitely rein in any market gains for the year.
In short, let’s remain cautious about our summer ‘sugar high’ rally, and understand that there will likely be additional turbulence ahead as election season heats up, the Fed announces its policy plans, and investors turn to our leaders for decisive action.
Tuesday: Producer Price Index, Retail Sales, Business Inventories
Wednesday: Consumer Price Index, Empire State Mfg. Survey, Treasury International Capital, Industrial Production, Housing Market Index, EIA Petroleum Status Report
Thursday: Housing Starts, Jobless Claims, Philadelphia Fed Survey
Friday: Consumer Sentiment
USDA revises crop estimates lower because of historic drought. The USDA reduced its forecasts for corn and soybean crops due to the impact of the drought on the Corn Belt. Analysts were shocked at the dramatic reduction, which is down 13% since 2011 and will strongly affect food and commodities prices later this year. Some analysts believe that overall food prices could go up by as much as 5% next year.[v]
Mortgage rates remain above 3.5% for second week. Interest rates on fixed rate mortgages rose to 3.59% after dropping to an historic low of 3.49% two weeks ago. Interest rates tend to follow Treasury yields, and the increase in rates has followed positive economic announcements, which have reduced demand for Treasury securities. [vi]
U.S. trade deficit falls to lowest level in 18 months. The trade deficit fell in June, helped by a steep drop in oil imports and a modest increase in exports. Despite Europe’s troubles, exports to the Eurozone increased by 1.7%.[vii]
Unemployment claims fell to 361,000 last week, consistent with modest gains in hiring. Despite July numbers skewed by seasonal factors, the distortions seem to have stopped and the job market may have pulled out of its midyear slump. Although the job market is not healthy, the economy added 163,000 new jobs in July, the biggest increase since February.[viii]