Weekly Update – September 24, 2012

During the past three months, the stock market has turned in one of its strongest performances in U.S. history. Since early June, the Dow Jones Industrial Average has gained 12%. If this rate of increase continued, it would offer close to a 50% annualized gain.[i] But of course, such expectations are entirely unrealistic. While we are grateful for market gains when we can notch them, we must acknowledge that healthy markets move up and down.

In keeping with this behavior, markets closed slightly down last week as investors weighed promises by the Fed and other central banks against signs of economic hurdles and political challenges ahead. The S&P closed 0.38% lower, the Dow lost 0.1%, and the Nasdaq trimmed 0.13%.[ii]

Federal Reserve officials made the rounds last week, giving speeches and expressing support for the Chairman’s efforts to stimulate the economy. Some comments lead analysts to believe that the Fed will act on its strong mandate and take further action if necessary; however, most believe it will leave policies unchanged until the end of the year. While investors cheered the recent aggressive Fed actions, some believe the move indicates the U.S. recovery is still uncertain at best.[iii]

As we near the end of the third quarter, we will begin to see the first corporate earnings reports. Profit warnings from companies in the S&P 500 are outpacing positive pre-announcements by the largest margin in 11 years, indicating that businesses are still feeling the economic crunch.[iv] Because companies have been cutting earnings estimates for months already, there is a possibility that weak earnings  could trigger a decline in stock prices. Even so, equities could heat up in the first week of October due to market-moving events like the release of unemployment data, the presidential debate, and the Eurozone finance meeting.

As the elections near, politicians are ramping up the rhetoric, but still failing to deal with the fiscal cliff, a huge issue in the minds of analysts and investors. Although we wish that legislators would get their priorities straight and do their jobs, it is unlikely that any major resolution will be reached until after the elections. Should you have any questions about how the fiscal cliff or any other issue could affect your personal financial picture, please contact us. We are always happy to provide guidance.

ECONOMIC CALENDAR:

Monday: Dallas Fed Mfg. Survey

Tuesday: S&P Case-Shiller HPI, Consumer Confidence

Wednesday: New Home Sales, EIA Petroleum Status Report

Thursday: Durable Goods Orders, GDP, Jobless Claims, Pending Home Sales Index

Friday: Personal Income and Outlays, Chicago PMI, Consumer Sentiment

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized.
Sources: Yahoo! Finance, MSCI Barra. Past performance is no guarantee of future results.
Indices are unmanaged and cannot be invested into directly. N/A means not available.

HEADLINES:

Homebuilders see strong third quarter. In a further sign that the housing sector may have turned the corner, U.S. homebuilder KB Homes, reported strong third quarter earnings. The company reports that it is experiencing rising orders for new homes as inventory drops and housing prices rise.[v]

Jobless claims rise in 26 states. Unemployment rates rose in 26 states in August, according to a Labor Department report, although most states still showed lower rates than a year ago. 42 states and the District of Columbia had lower rates last month than in August 2011.[vi]

Oil prices near $93 per barrel. Oil prices rose higher Friday as traders weighed slowing economic growth and reduced demand for oil against potential supply disruptions in the Middle East. Higher energy prices as we head into the winter months could hit consumer spending hard.[vii]

Concern grows about China’s hard landing. A raft of negative economic reports is raising concerns that China’s economy will not recover. A one-two punch of softening domestic and foreign demand is threatening the giant’s economic stability. A recent report shows that manufacturing grew only slightly in September and that foreign direct investment fell in August for the third month in a row.[viii]

QUOTE OF THE WEEK:

“Leadership is a potent combination of strategy and character. But if you must be without one, be without the strategy.” – Norman Schwarzkopf

http://www.reuters.com/article/2012/09/14/us-usa-economy-prices-idUSBRE88B1JM20120914