Leadership Vacuum Weighs on Markets

Weekly Update August 6, 2012

Although the week started off slowly, markets experienced a couple of volatile trading sessions on Thursday and Friday with the Dow dropping more than 180 points on Thursday before surging more than 200 points on Friday with the release of some upbeat domestic economic reports. Overall, markets finished
flat or slightly up with the S&P picking up 0.36%, the Dow edging just 0.16%, and the Nasdaq gaining 0.33%.[i]

Thursday’s downturn in equities was driven largely by Wall Street’s realization that European Central Bank emperor Mario Draghi has no clothes. Markets spun in reverse after Draghi failed to announce any measures to back up last week’s bold talk about saving the Euro at all costs. As we mentioned in the last update, there simply isn’t enough money in the European economy to bail out every periphery country. Until Eurozone leaders are willing to support EU-wide underwriting of bond purchases by the ECB, there isn’t much Draghi can do to back up his words.[ii]

Domestically, traders reacted very positively to Friday’s jobs report, which showed 163,000 new nonfarm jobs in July, beating expectations of 100,000 – meaning we’ve potentially avoided a double-dip recession so far. However, markets may be showing some irrational exuberance as the report held plenty of
bad news as well. The labor force participation rate shrank, and small businesses continued cutting jobs last month; two factors which led to the rise in unemployment. For July, the unemployment rate ticked upward a notch to 8.3% from 8.2%.[iii]

A mediocre jobs report combined with a struggling manufacturing sector and slow business revenues means that the U.S. economy still has a long way to go before we can call it healthy. Add in the tax and regulatory threats coming down the pike in the form of Bush tax cut expiration and mandatory
spending cuts, and we’ve got a recipe for trouble in the New Year. We hope Congress enjoys its five-week vacation and comes back refreshed and ready to deal with some serious issues before the November elections.




Monday: Ben Bernanke Speaks 9:00 AM ET

Tuesday: Ben Bernanke Speaks 2:30 PM ET

Wednesday: Productivity and Costs, EIA Petroleum Status Report

Thursday: International Trade, Jobless Claims

Friday: Import and Export Prices, Treasury Budget



Data as of 8/3/2012 1-Week Since 1/1/2012 1-Year 5-Year 10-Year
& Poor’s 500
0.36% 10.61% 10.37% -0.59% 6.09%
DOW 0.16% 7.19% 7.85% -0.65% 5.75%
NASDAQ 0.33% 13.92% 10.21% 3.64% 13.78%
1.23% 5.35% -6.99% -4.77%  3.95%
Treasury Note (Yield Only)
1.55% N/A 2.60% 4.70% 4.26%

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.



Retailers report strong sales in July. A combination of hot weather and clearance sales drew in American
customers, giving retailers solid sales going into the back-to-school season. Retailers have been aggressive with promotions as the second-largest shopping season kicks off.[iv]

Long-term unemployed and discouraged workers numbers fell in July. Despite the increase in unemployment, the number of discouraged workers – those who have given up looking for work – dropped by 267,000 as compared to a year ago. The number of long-term unemployed workers – those out of work for 6 months or more – fell by 3.4% in July.[v]

Consumer confidence rose in July. Despite lingering unemployment, Americans were unexpectedly
optimistic about short-term business and employment prospects. Although respondents were concerned about rising prices, they expect to see more jobs in six months.[vi]

Wal-Marts stock surge means times are tough for low-income Americans. The retailer’s recent stock jump – to a record $74.80 on July 27 – and its strong earnings report could mean that low-income families are feeling the financial squeeze. Wal-Mart is planning to go after these consumers by lowering prices on food and consumables.[vii]

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