Steadily Inching Forward
Weekly Update – August 20, 2012

Investors experienced another quiet week as slow trading and modestly encouraging economic data failed to rouse much excitement. U.S. trading volume has declined in recent weeks as traders take vacations and investors wait for clues from the Fed summit at the end of the month and the ECB meeting in September. All the major indices closed up for the week, with the S&P picking up 0.87%, the Dow gaining 0.51%, and the Nasdaq inching 1.84%.

Markets got a mild boost from domestic economic data on Thursday, but the rally lacked conviction. Equities continued their slow upward grind on Friday, boosted by a solid consumer sentiment reading. The Michigan Consumer Sentiment survey exceeded the consensus estimate, indicating that consumers are feeling more optimistic about their prospects in this economy.[i] Rising consumer confidence raises the odds that American households can sustain the spending that led to July’s pickup in retail sales, setting the stage for stronger growth in this quarter.

On another positive note, U.S homebuilder confidence hit a five-year high this month. Homebuilders are upbeat about their economic prospects as home sales approach levels not seen since the housing bubble burst. Low mortgage rates and a decline in unsold homes have fueled improved sales, and banks have aided the housing recovery by holding back foreclosed homes to avoid flooding the market.[ii]

Over in the technology sector, Groupon (GRPN) and Facebook (FB), two social media darlings, are feeling the pain of poor market sentiment. Shares of both companies finished the week at all-time lows; Facebook has lost nearly half its market value since its IPO in May and Groupon is now a sub-$5 stock. Groupon was hammered this week by a poor earnings report and concern about its cash position, while Facebook lost 4% on Friday as the first investor lock-up period expired and allowed insiders to sell their holdings. Both companies have struggled in the market since their respective IPOs and can be held up as cautionary tales of the dangers of jumping into fad stocks.[iii] [iv]

Next week will see the release of earnings reports from technology heavyweights Dell (DELL), and Hewlett-Packard (HPQ), providing insight into how they’re coping with soft personal computer sales and changing industry trends. We’ll also see the release of meeting minutes from the Fed’s FOMC meeting, which may give investors the clues they’re waiting for about the Fed’s plans for quantitative easing.

ECONOMIC CALENDAR:

Wednesday: Existing Home Sales, EIA Petroleum Status Report, FOMC Minutes

Thursday: Jobless Claims, New Home Sales

Friday: Durable Goods Orders

 

 

 

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:

Industrial production rises for fourth straight month. American factories produced more cars, airplanes, and other durable goods last month in a hopeful sign that the manufacturing sector is improving. Factory output had slowed this spring on reduced demand from Europe but appears to be poised for additional growth this quarter.[v]

Housing starts dipped in July, but permit applications are up. U.S. homebuilders slowed their rate of new construction in July; but, in a sign of optimism about future construction, applications for permits reached the highest level since August 2008.[vi]

Unemployment claims edge upward, but data shows modest hiring. The number of workers applying for unemployment ticked slightly higher last week but remained below 375,000, which is the magic number for the jobs recovery – unemployment applications above 375k indicate a worsening jobs market. Applications have trended lower for the past two months, indicating that employers are laying off fewer workers and hiring new ones.[vii]

Europe is getting back to business. In a signal that August vacations are ending and it is time for European leaders to start grappling with the sovereign debt crisis again, Angela Merkel, the German chancellor, has expressed cautious support for measures to support Spain and Italy, while a Finnish official has suggested that euro zone leaders are preparing for the worst, including a possible breakup of the currency bloc.[viii]

QUOTE OF THE WEEK:

 

 

 

“Don’t judge each day by the harvest you reap but by the seeds that you plant.” – Robert Louis Stevenson

 

 

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