Mixed Signals

Weekly Update June 25, 2012

Markets had a lackluster week as investors shrugged off two pieces of relatively positive news: that Greeks voted a pro-bailout party into office, and that the Fed took additional action to stimulate the economy. Despite a couple of strong trading sessions, markets lost ground for the week; the S&P closed down 0.58%, while the Dow lost 0.99%, and the Nasdaq gained 0.68%.

On a positive note, a few reports released last week indicate the economy could pick up steam again. April housing starts were revised upwards to 744,000, and building permits climbed from 723,000 in April to 780,000 in May, beating economists’ expectations and hopefully indicating the housing sector is improving.[i] Also noteworthy, the Conference Board’s index of leading indicators, a measure of future economic activity, rose to its highest level in four years last month, signaling that the economy should keep growing at a modest pace this year.[ii]

The biggest news last week was that the Federal Reserve will take additional measures to boost the economy by swapping another $267 billion of short term bonds for long term ones, and extending “Operation Twist” through the end of the year. The idea is to lower the interest rate of the longer bonds, which in turn is supposed to lower interest rates for borrowers on mortgages, cars, and business loans. Fed Chairman Bernanke stated that additional easing would be considered if necessary, but many investors
hoped for more from the Fed, particularly in light of its tepid economic forecast for 2012. The Fed now expects GDP growth to range from 1.9% to 2.4%, down from previous estimates of 2.4% to 2.9%, and expects unemployment to remain between 8.0% and 8.2%. Markets responded poorly to the news, highlighting concern that the Fed is running out of bullets and may not be able to respond effectively to further challenges.[iii]

Coming weeks could be hard on equity markets if the global economy continues to slow, though investors have shown signs of resilience lately, indicating that many negative factors might be priced in. There are a lot of mixed signals right now, and it is simply impossible to predict how the market will respond.
In uncertain times like these, it is especially important to stick to a comprehensive, long-term investment strategy.

On a side note, traders will be closely watching Monday’s Supreme Court ruling on President Obama’s healthcare plan; whichever way the vote goes, we will likely see some action in the healthcare sector.[iv]

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