Can we have a Summer Rally?
Equity markets managed to break a losing streak and closed basically flat for the week as second quarter earnings season kicked off. The S&P gained 0.16%, the Dow grew 0.02%, and the Nasdaq lost 0.98%. Friday saw earnings released by financial heavyweights J.P Morgan Chase (JPM) and Wells Fargo (WFC), which provided a much-needed boost to the financial sector. Although J.P. Morgan posted losses of $4.4 billion, – contaminated by bad trades and write offs – strong performance from their Investment Bank and Housing unit suggests the bank is on its way back to health. Wells Fargo also posted better-than-expected results as the housing sector boosted their quarterly performance. While these first reports were largely seen as positive, many are still expecting lackluster performance from tech and other sectors.
Unemployment claims temporarily sank last week; however, a major factor in the drop is that automakers reduced or missed some of their usual seasonal shutdowns to keep up with demand, leading to fewer summer layoffs. Analysts expect unemployment claims to rise again in coming weeks. On a positive note, the rise in demand for cars indicates that consumer spending on big-ticket items is still strong.
Investors will be paying close attention to Ben Bernanke’s speeches to the House and Senate next week, looking for indications that the Fed is considering further quantitative easing. Last week’s FOMC minutes did not mention further easing, Fed was examining additional stimulus tools. This may suggest that policymakers are concerned about whether their arsenal is running low on firepower. The minutes also show that officials are worried about the effects of tax hikes due in January 2013 and the spending cuts that will kick in at the end of the year. We worry about this too. Let’s hope the politicians do their job.
Earnings season will start in earnest next week, and we can expect results to dominate the headlines. A slew of economic reports are also due to be released, hopefully showing us a way out of the doldrums we’ve been experiencing these past few weeks.
HEADLINES:
Domestic energy supplies save Americans money. A recent report finds that the economic benefits of domestic energy production could be as much as $1 billion per day in cost savings. The savings from domestic natural gas and finished petroleum products could be saving the U.S. from another recession.
China beats GDP growth expectations. China reported 7.6% GDP growth, beating economists’ expectations and bolstering hope that the Chinese economy is doing better than expected. Stocks rebounded on the news Friday.
Wholesale prices rose slightly in June. After falling for two straight months due to lower energy costs, the Labor Department reported that the Producer Price Index had risen slightly in June by 0.1%. A major factor in the rise is increased food costs, which are offsetting the drop in energy prices.
Prolonged Midwestern drought could increase food prices. Ongoing droughts in states like Ohio and Missouri have damaged corn and soybean yields, leading to higher grain prices for livestock. This may be felt by consumers in the form of higher food prices later this year.
