Market Week: August 15th, 2011

The Markets

W is for whiplash: There's volatility, and then there's volatility. Two of the Dow's 11 worst days ever (in points) occurred last week; however, they alternated with two of the Dow's 11 best days.* Intraday flip-flops of 500 points on the Dow became daily occurrences, alternately encouraging investors and grating on their already frayed nerves. The S&P 500 is now down 13.5% from its year-to-date high on April 29, and with a 19.4% drop since that date, the small-cap Russell 2000 is a whisker away from the 20% bear-market threshold. However, despite domestic equities' W-shaped wild ride, last week was still a better one than either of the previous two. And even Monday's 635-point, 5.5% plunge in the Dow didn't come remotely close to the 22.6% drop seen on October 19, 1987.

Soaring demand for gold, which sent prices briefly above $1,800 an ounce only days after it topped $1,700, also led the U.S. Mint to briefly halt online sales of gold coins to collectors. Oil's decline to roughly $80 a barrel on fears about the potential for a second global recession promised consumers a shard of good news: the prospect of lower gas prices.



Last Week's Headlines

• Concern about weaker-than-expected economic data led the Federal Reserve's Open Markets Committee to announce that it plans to keep interest rates at their current extreme lows through at least mid-2013 to try to give a gasping recovery some breathing room. It was the first time the Fed had put a time frame on the "extended period" of low rates that it has been promising. However, there was no sign of a new round of bond-buying.

• In one of the market's more ironic twists, post-downgrade anxiety about the turmoil in equities and overseas debt resulted in high demand at two of last week's Treasury auctions. That demand in turn resulted in record low yields for 3-year Treasury notes (0.5%) and 10-year notes (2.14%). However, investors weren't quite as sanguine about longer-term bonds; the yield at an auction of 30-year Treasuries bounced up 25 basis points to 3.75%.

• France became the latest European country to spook global investors. Fears about the level of Italian debt held by French banks led to concerns about possible downgrades there, and the cost of insuring French sovereign debt in the form of credit default swaps rose. 

• Meanwhile, to try to meet the European Central Bank's demand that Italy's budget be balanced by 2013, Prime Minister Silvio Berlusconi announced a much-awaited €45.5 billion package of spending cuts and tax hikes.

• In the wake of the U.S. debt downgrade, Standard & Poor's also downgraded to AA+ the debt of Fannie Mae, Freddie Mac, and 10 of the country's 12 Federal Home Loan Banks. All help make credit available for mortgages and community lending, and are supported by the U.S. government. S&P also is reviewing the downgrade's potential impact on local and state governments that get federal funds, and some insurers; however, the U.S. downgrade would not automatically mean the same for munis.

• U.S. consumer sentiment during the first week of August was lower than it was during the recession and the 2008 financial crisis. The 54.9 reading on the Thomson Reuters/University of Michigan's most recent survey is not only a sharp drop from July's 63.7, but is the lowest since 1980.

• The market turmoil briefly put Apple ahead of ExxonMobil as the U.S. company with the biggest market cap.

• Interest rates on 15-year fixed, 5-year adjustable, and 1-year adjustable rate mortgages hit all-time lows, according to Freddie Mac, and 30-year fixed-rate mortgages were at a 2011 low of 4.32%.

• Retail sales hit their best level in four months, increasing by 0.5% from June. The Commerce Department said it was the second consecutive monthly increase.

• After announcing last month that it plans to close as many as 3,700 post offices, the U.S. Postal Service warned Congress it would face the equivalent of bankruptcy unless it can cut employee benefits and 120,000 jobs by 2015. The job cuts would be in addition to the 100,000 jobs to be eliminated through attrition.

• An appellate court ruled that individuals cannot be compelled to buy health insurance as part of President Obama's health-care legislation. The decision contradicted another appellate court's ruling upholding the requirement and likely set the stage for the Supreme Court to rule on the issue.

Eye on the Week Ahead

Investors will be watching to see if the upward movement at the end of last week signals the beginning of an end to the recent downdrafts, or whether the beatings will continue until morale improves. The ailing housing market also will be in focus, and options expiration at the end of the week could mean increased volatility (though it's hard to see how it could beat last week).

Key dates and data releases: international capital flows (8/15); housing starts, industrial production (8/16); wholesale inflation (8/17); consumer inflation, home resales (8/18); options expiration (8/19).

*Based on data from the Stock Trader's Almanac 2011 . Data source: Includes data provided by Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. Equities data reflect price change, not total return.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

Market Week August 8, 2011

The Markets

With a Treasury default off the table, investors focused once again on economic data. They didn't like what they saw: stalling growth, the prospect of less federal spending to help prop it up, and worsening debt problems in Europe's third and fourth largest economies. And that was before Friday evening's U.S. credit rating downgrade by Standard and Poor's, which said Tuesday's deficit reduction agreement falls short of what is needed to stabilize the government debt problem by mid-decade.

Two weeks of almost daily declines were capped off by Thursday's 513-point hit to the Dow--the ninth worst day in points (though not percentage) in its history--and a roller-coaster Friday. The volatility left all four domestic indices in correction territory, typically defined as a 10% drop. By Friday, the S&P 500 had lost 10.8% in just over two weeks and had broken below a closely watched technical level. It is now down 11.4% from its recent July 7 high, while the Dow industrials have lost 10% in the same time. Both the Nasdaq and the small-cap Russell 2000 lost more than 5% on Thursday alone; the Nasdaq is now down roughly 12% and the small-cap Russell 2000 16.7% since July 7.

The debt limit agreement and global pain in equities helped shore up the reputation of Treasury securities as a refuge for the anxious. The yield on the 10-year bond had edged downward as a debt deal seemed within reach and investor demand sent prices higher, though they nudged upward again on Friday even before S&P's after-hours downgrade.



Last Week's Headlines

The acrimonious debate over raising the Treasury's borrowing authority ended with passage of the Budget Control Act of 2011. The legislation increases the debt ceiling by $2.1 trillion in stages, cuts $917 billion in spending over the next 10 years, and establishes a congressional "supercommittee" that has until Thanksgiving to recommend ways to cut at least another $1.2 trillion from the deficit. Unless it does so, or if Congress fails to adopt those proposals, an additional $1.2 trillion in budget cuts would be implemented beginning in 2013.

For the first time in history, Standard and Poor's downgraded U.S. debt one notch from its impeccable AAA rating to AA+. S&P also reaffirmed its negative outlook for the long term, indicating another downgrade is possible within the next two years. S&P's statement, released hours after Friday's market close, said that "the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed." It also said that the "political brinksmanship of recent months highlights what we see as America's governance and policy-making becoming less stable, less effective, and less predictable." Moody's and Fitch maintained their triple-A ratings, though Moody's also put the United States on negative outlook and Fitch said it will conduct a more thorough review over the next month. Meanwhile, after conferring by phone, leaders of the G7 nations said they were "ready to take action to ensure stability and liquidity in financial markets."

Employers added a better-than-expected 117,000 jobs to the nation's payrolls in July, and unemployment dipped slightly to 9.1%. However, Bureau of Labor Statistics data show that this is the 30th consecutive month in which unemployment has remained above 8%. The private sector added 154,000 new jobs, which were partially offset by the loss of 37,000 government jobs (the ninth consecutive decline).

Yields on the 10-year bonds of Italy and Spain briefly moved above 6%, coming closer to the level at which investor reluctance helped touch off the need for bailouts of smaller countries. Both the Bank of England and the European Central Bank kept interest rates unchanged; the ECB also indicated it will resume buying sovereign bonds, a la QE2.
European uncertainty may have been a boon for the week's Treasury auctions. At one point the 10-year yield had fallen almost 50 basis points from the prior week's 3%, indicating robust demand despite the debt debate, and short-term debt was paying roughly zero.

The Institute for Supply Management's index of U.S. manufacturing activity fell sharply in July, continuing its recent slower-growth trend and hitting its lowest level since July 2009. The 4.4% decline left the ISM index just over the 50% level that separates expansion and contraction. However, at 49.2%, new orders saw contraction for the first time in two years. And growth in the ISM's gauge of the services sector--the largest component of the U.S. economy--slowed to 52.7% from June's 53.3%.

Americans have been taking in a little more money lately, but they haven't been spending it. Incomes were up 0.1% in June, according to the Bureau of Economic Analysis, but consumer spending dropped 0.2% and the personal savings rate rose to 5.4% of income. Wages and salaries fell by $2.2 billion--a far cry from May's $15 billion increase--while income from assets such as interest and dividends increased by $12 billion.
Eye on the Week Ahead

Global markets get their first opportunity to react to the U.S. debt downgrade. And in light of recent weak economic statistics as well as the downgrade, the Federal Reserve's statement will be closely watched for any hints that QE3 might be contemplated.

Key dates and data releases: labor productivity/costs, Federal Reserve Open Markets Committee announcement (8/9); international trade (8/11); retail sales, business inventories (8/12).

Data source: Includes data provided by Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. Equities data reflect price change, not total return.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

MARKET WEEK: AUGUST 1, 2011

The Markets

Weak economic numbers and the debt ceiling standoff put steady downward pressure on equities. However, in the face of Tuesday's deadline, Treasuries showed a reassuring resilience, though spreads between short-term and long-term Treasury debt narrowed. Yields on T-bills with durations of six months or less jumped while the 10-year benchmark yield actually fell, suggesting that investors were more confident about the long term than the short term. The uncertainty also dented the dollar and sent gold to yet another record.



Last Week's Headlines

Down to the wire: After partisan votes in both houses of Congress tried the patience of the country and the world, the weekend seemed to promise light at the end of the tunnel. Though no legislation had been signed or even passed by both houses of Congress, leaders announced that with roughly 48 hours to go before the August 2 deadline for an increase in the Treasury's borrowing authority, they had reached an agreement to submit to their respective members. The agreement would increase the debt ceiling by roughly $2 trillion--enough to get through 2012--and cut roughly $900 billion from discretionary spending over ten years. A new bipartisan congressional committee would have until Thanksgiving to recommend an additional $1.5 trillion in deficit reduction measures. Failure to approve those measures would trigger additional automatic budget cuts in such areas as defense and Medicare provider payments.

Economic growth during the second quarter was a scant 1.3%, according to the initial estimate from the Bureau of Economic Analysis. Even more discouraging was the downward revision to the estimate for Q1. It put the figure at 0.4%--essentially flat, and substantially lower than the earlier 1.9% figure. What growth there was in Q2 was fueled by exports, nonresidential fixed and private inventory investment, and federal spending; higher imports and cuts in state and local government spending acted as a drag.

May brought higher home prices in the 20 cities tracked by the S&P/Case-Shiller index. Prices rose 1% from the month before, though they were down 4.5% from last year. Meanwhile, the Department of Commerce said June new home sales were down 1% from May, though they were up 1.6% from June 2010.

Hurt by fewer orders for cars and planes, durable goods orders fell 2.1% in June, according to the Department of Commerce. It was the second decline in the last three months.

Eye on the Week Ahead

Assuming debt-ceiling legislation can be passed in the hours leading up to midnight Tuesday, investors will watch Treasury auctions scheduled for Wednesday for any signs of weaker demand. Bond rating agencies will be under scrutiny for their assessments of the proposed deficit reduction measures. Once the shouting is over, corporate earnings may have more impact, and Friday's jobs report may once again focus attention on the world outside Washington.

Key dates and data releases: manufacturing, construction spending (8/1); auto sales, personal income/spending, deadline for increase in debt ceiling (8/2); factory orders, U.S. services, Treasury auctions of 3-year, 10-year, and 30-year securities (8/3); unemployment/payrolls (8/5).

Data source: Includes data provided by Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. Equities data reflect price change, not total return.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.