A Week in the Rearview - week ending 4/18/08
In the headlines
A look at some of the market movers over the past week:
- Wachovia (NYSE: WB) announced a first quarter loss and other banks, including JPMorgan (NYSE: JPM) and Merrill Lynch (NYSE: MER) followed with similarly lackluster results
- Blockbuster (NYSE: BBI) made a surprise offer for Circuit City (NYSE: CC)
- Delta (NYSE: DAL) announced that it is buying Northwest (NYSE: NWA) for $3.1 billion
- Brazil’s Petrobras (NYSE: PBR) may be sitting on a massive oil field
- Standard & Poor’s warned that a government rescue of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) would likely have consequences on the government’s credit rating
- The London interbank offered rate came under scrutiny
- Intel (Nasdaq: INTC) gave the tech sector some pep and IBM (NYSE: IBM) followed with more of the same
- There is still no stopping the rising price of oil
- Energy and food boosted wholesale prices, though core CPI was within expectations
- The Fed’s beige book showed slowing economic output through most of the country
- Sallie Mae (NYSE: SLM) said that times are tougher than ever
- Google (Nasdaq: GOOG) crushed earnings expectations
Commentary
It’s earnings season once again. For the next few weeks, that will be the beginning and end of the story. With serious questions about the strength of the economy still swirling, investors are going to be looking at each and every major earnings announcement as another data point on where the market will be headed.
So far, the market has been receptive to most of the earnings announcements, and the market finished the week up more than 4%. It seems that most of the weakness from the financials had been anticipated, if not overestimated, and the positive notes from Intel, IBM, and Google provided an extra push.
On the flip side, reports coming from the government have yet to start showing any light at the end of the tunnel. Economic activity continues to slow and appears to be fairly geographically broad. Housing continues to scrape lows that haven’t been seen for a long time and lack of demand combined with hesitant financing seems to promise that it won’t change quickly. Meanwhile, measures of inflation continue to track higher, thanks in large part with soaring energy prices.
Looking ahead
Though the economic indicators are hardly encouraging, it should be noted that the market has already assumed at least some amount of broad economic weakness in the coming months. That means that as new reports come out, the market — rather than reacting to whether the news is objectively “good” or “bad” — will react to whether the news is above or below the generally held expectations.
As earnings season presses on, though, earnings reports will likely overshadow economic indicators. Though the showing so far appears to have exceeded the market’s expectations, the real test will be the reports from retail and consumer-based businesses. There is a lot of concern that the current economic issues are going to depress consumer spending, so there will be a lot of focus on retail earnings for signs of that slowdown and how pervasive it is.
Looking at the bigger picture, however, there are still no signs that the current problems are intractable or will permanently damage the US or global economy. There have been major excesses to be sure, and in some areas there have been excesses greater than we’ve ever seen. However, it appears at this point that these problems will work through the system in a reasonable amount of time. For long term and retirement savers, this means that the green light is still on to continue steadily saving and investing in a diversified portfolio. Leveraging the advantage of time, long term investors are likely to benefit from the current uncertainty and depressed prices.
