Weekly Maket Update for July 23, 2012

Markets shook off a raft of disappointing economic data and feeble earnings reports to remain in positive
territory this week: The S&P gained 0.43%, the Dow edged up 0.36%, and the Nasdaq rose 0.58%. Persistent speculation that the Fed will step in to boost the economy seems to be bolstering markets.[i]

During his speeches before the House and Senate last week, Bernanke outlined some of the Fed’s options to help boost the economy if it is required. Easing tools could potentially include further purchases of Treasury and mortgage-backed securities, or even using the Fed’s discount window for direct lending to banks; although many critics question the ability of such actions to do lasting good.[ii]

Highlighting just how fickle stocks can be, equities initially fell as Fed Chairman Bernanke’s Wednesday testimony provided no specific plans for boosting growth, then recovered when he later signaled during Q&A that he’s concerned about the economic recovery.[iii] It’s hard not to be dumbfounded when markets move based on mere words and not on the underlying strength of companies.

Analysts believe that although the Fed has not settled on a course of intervention, either a further
decline in the job market or an increase in deflation risk will trigger action.[iv] Bernanke and his colleagues have two weeks until the next scheduled FOMC meeting in which to review economic data and make a policy decision.

Concerns about Europe dominated the second half of the week and pushed down stocks on
Friday. Ratings firm Egan Jones downgraded Spain’s sovereign debt rating from CCC+ to CC+ (closer to junk territory) following news that the Spanish region of Valencia would need government help to meet debt obligations. Egan Jones has been aggressive in its downgrading of Spanish debt, and now rates the
probability of default at 35%. Despite the recent bailout agreement, analysts worry that Spain may be hiding additional debt obligations owed by its regions.[v]

One bright spot closer to home: U.S. Housing starts increased 6.9% in June to beat consensus expectations,
and are up 23.6% versus a year ago – the highest level since October 2008. This marks the fifth straight quarter that home building is boosting the economy, and there’s still plenty of room to grow. Digging deeper into the data, both single-family and multi-family housing starts are on the rise, and the total
homes under construction (started but not yet completed) rose for the tenth straight month. Essentially, this shows that builders are breaking ground on more homes than they are completing. So while the housing market is still far from healthy, this is a sign that stabilizing prices and low interest rates are giving some Americans the confidence to trade up to new homes.[vi]