Market Week: The Economy Stinks, but Not Necessarily the Stock Market

Posted by Michael Bradley, CFA on June 13, 2011 ·  


On June 10th, the Dow dipped below 12,000 and posted its sixth straight weekly decline. This is the longest losing streak since October 2002. There’s really no shortage of bears right now and the indicators are certainly indicating a slowdown. Adding to concerns about a “double dip recession” are the ongoing struggles in Washington over increasing the debt limit are undoubtedly intimidating Main Street investors.

But, we remain optimistic about the market. The S&P 500 is a relatively small sliver of the US economy and Q2 earnings projections are quite good. Aggregate estimates are basically unchanged from late May. Overall, expectations are for a 14.6pct growth for the quarter and a 10.4pct jump in revenues. (That double-digit revenue growth would be the best since Q1 2010.) The PE ratio of the market is about 16, which is well within reasonable territory and is lower than the 18.3 reported a year ago.

So, our predisposition is to remain conservative, to sell stocks that continue to underperform, but otherwise to hold tight. We continue to remain concerned about bonds and are being very selective in our purchases. That having been said, a surprising level of firmness in the municipal bond market suggests that there is value in there, as states will likely see improvements in their outlooks over the coming months and years.

Please don’t hesitate to call!

Best, Mike

Market Week: June 13, 2011

The Markets


Another painful week, capped off by Friday’s 172-point drop in the Dow, extended equities’ slow, steady slide. Over the last six weeks, the S&P has fallen 6.8%, while the Dow is down 6.7%. The Nasdaq and Russell 2000 have fared even worse, losing almost 8% and 10% respectively since the beginning of May; along with the Global Dow, both have now given up all their year-to-date gains. Meanwhile, the yield on 10-year Treasuries remained under 3%.
Market/Index 2010 Close Prior Week As of 6/10 Week Change YTD Change
DJIA 11577.51 12151.26 11951.91 -1.64% 3.23%
NASDAQ 2652.87 2732.78 2643.73 -3.26% -.34%
S&P 500 1257.64 1300.16 1270.98 -2.24% 1.06%
Russell 2000 783.65 808.13 779.54 -3.54% -.52%
Global Dow 2087.44 2121.55 2071.09 -2.38% -.78%
Fed. Funds .25% .25% .25% 0 bps 0 bps
10-year Treasuries 3.30% 2.99% 2.99% 0 bps 31 bps

 

Last Week’s Headlines

  • Consumer debt rose in April at an annualized rate of 3.1%, according to the Federal Reserve. The increase was the seventh consecutive monthly increase, and was primarily the result of higher non-revolving credit such as car, student, and personal loans rather than credit card debt, which fell during the month.
  • Four of the Federal Reserve’s twelve districts reported slowing economic growth over the last two months, but the rest saw continuing moderate expansion; the Dallas region even recorded accelerating growth, according to the Fed’s “beige book” report. However, in the “no surprises here” department, real estate and oil prices continued to be a problem nationwide.
  • OPEC members failed to reach an agreement on whether to increase oil production to compensate for the Libyan conflict’s impact on that country’s oil output. However, Saudi Arabia reportedly said it would increase its production to ensure adequate global supplies.
  • The U.S. trade deficit fell to its lowest level of the year in April, according to the Bureau of Economic Analysis. Reduced demand for oil–the result of higher prices and a weaker economy–coupled with supply-chain disruptions caused by Japan’s multiple disasters cut imports, while exports increased. The combination cut the trade deficit to $43.7 billion from $46.8 billion in March.
  • As the U.S. continued to live on borrowed time with regard to its debt ceiling, Fitch Ratings warned that the nation’s debt would be put on watch for a downgrade if the issue isn’t resolved by early August.

 

Eye on the Week Ahead

 

Inflation numbers will be closely watched, while retail sales will suggest the consumer’s willingness to spend. The quarterly options expiration at week’s end could bring volatility.

Key dates and data releases: wholesale inflation, retail sales (6/14); consumer inflation, industrial production, international capital flows (6/15); housing starts (6/16); quadruple witching options expiration, leading economic indicators (6/17).

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.

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