Markets trying to figure out where the economy is headed
A recent article from the New York Times that was reprinted by CNBC, likened the late-2000s recession to an earthquake, and recent volatility to aftershocks. The article said: “Like earthquakes, financial crises seem to be accompanied by aftershocks, like the one we’ve been living through this week.
They can feel every bit as bad as the crisis itself. But economic history and academic research suggest they can set the stage for a sustainable recovery — and eventual sharp stock market gains.” We found this to be a particularly fitting illustration, and a valid point.
It’s no secret that dizzying stock market moves in recent weeks have been difficult to stomach. Think of all the events we’ve had to face leading up to this – controversy in Washington over the debt ceiling, Standard & Poor’s downgrade of America’s prized credit rating, renewed fears about European debt, and a gut-wrenching plunge in the stock market. The uncertainty of everything culminated in the wild ride we took last week.
To recap: On Monday the Dow Jones Industrial Average fell almost 635 points, then rose nearly 430 points on Tuesday, only to see another drop of almost 520 points on Wednesday. Helped by some positive earnings results, the Dow soared 423 points Thursday and another 125 points on Friday. By week’s end, the benchmark index had closed at 11,269 and shed only 1.5% for the week. The S&P 500 Index logged similar performance.
You might want to take a deep breath after reading this paragraph.
Do we expect a measure of volatility to continue? There is a good possibility that it will, at least for a time. As long as confidence in the global economy and government policymakers remains shaky, markets are likely to be volatile. Even so, we still believe that fundamentals are strong, and we know that successful investing is a long term project undertaken with risk and uncertainty. Equity markets do not move in a straight line, and neither do economic recoveries. Despite being painful, volatile periods like this historically run their course and then come to an end. To quote an ancient proverb, “this too shall pass.”
ECONOMIC CALENDAR: Monday – Empire State Mfg Survey, Housing Market Index
Tuesday – Housing Starts, Import and Export Prices, Industrial Production Wednesday –Producer Price Index
Thursday – Consumer Price Index, Jobless Claims, Existing Home Sales, Philadelphia Fed Survey, Leading Indicators
Data as of 08/12/2011 1-Week YTD 1-Year 5-Year 10-Year
Standard & Poor's 500 -1.72 -6.27 8.79 -1.39 -0.10
Dow -1.53 -2.66 9.20 0.33 0.82
NASDAQ -0.96 -5.46 14.5 4.38 2.82
MSCI EAFE -1.56 -7.37 6.98 -1.45 2.06
10-year Treasury Note (Yield Only) 2.56 NA 2.73 4.97 5.02
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. NA means not available.
HEADLINES:
Italy's government has approved sharp budget cuts demanded by the European Central Bank despite regional opposition to the move. Italian officials said Friday the austerity measures include $28 billion in cuts next year and $35 billion in 2013.
The number of Americans claiming new jobless benefits fell to a four-month low last week, the Labor Department said in its weekly report, providing a ray of hope for the nation’s battered economy. Initial claims for state unemployment benefits fell 7,000 to a seasonally adjusted 395,000, the Labor Department said, the lowest level since early April. Economists had expected a reading of 400,000.
The tumbling price of crude oil this month and signs of falling fuel demand point to lower U.S. gasoline prices ahead, though consumers will have to wait for savings to trickle down to the pump. After reaching an almost three-year high of $3.97 a gallon in early May, U.S. retail gasoline prices have fallen nearly 30 cents on a combination of lower oil prices and flagging sales in the important summer-driving season.
The Securities and Exchange Commission has asked credit rating agency Standard & Poor’s to disclose who within its ranks knew of its decision to downgrade U.S. debt before it was announced last week, as part of a preliminary look into potential insider trading, people familiar with the matter say.
