A Week in the Rearview – week ending 8/1/08
In the headlines
A look at some of the market movers over the past week:
- KKR announced plans to go public via the acquisition of its publicly held European fund
- Unilever (NYSE: UL) announced the sale of its North American laundry business — which includes the Surf, Snuggle, Wisk, and Sunlight brands — to private equity firm Vestar Capital
- Investors were highly disappointed in the outlook from European airline Ryanair
- The FDIC found itself taking over two additional banks
- Merrill Lynch (NYSE: MER) announced two moves to continue trying to bail water from its balance sheet
- The White House lowered its economic growth forecast
- The SEC decided to extend its ban on naked short selling
- Wyeth (NYSE: WYE) and Elan (NYSE: ELN) took a hit as trial data from their Alzheimer’s drug candidate was not as conclusive as hoped for
- Though consumer confidence was up slightly in July, it remains at notably low levels
- Like many fellow large bank/brokerages Deutsche Bank (NYSE: DB) posted a steep drop in profits, but still managed to beat analysts’ estimates
- The US isn’t the only place where inflation is rearing its ugly head
- Jobless claims rose even more than economists had expected
- Increased joblessness led to the unemployment rate climbing to 5.7%
Commentary
The S&P 500 managed to stay just above flat for the week despite three down days out of the five. Monday started the week on a sour note as investors — particularly those that were starting to get bullish on financials again — digested the failure of two more banks. Tuesday came to the rescue with a gain of more than 2% as consumer posted a modest increase against the expectation of a decline.
Wednesday tacked on a bit more as oil prices and the ADP employment report weighed in positively. However, the balance of the week was spent declining. Employment, as measured by both the weekly initial jobless claims report and the monthly unemployment reading, highlighted the cracks in the economy.
Meanwhile, initial GDP readings for the second quarter came in well below what was expected. Though the 1.9% growth may still seem like a good sign, this quarter was expected to be higher due to the government’s tax rebate program. In addition to releasing second quarter GDP, readings on first quarter and fourth quarter 2007 readings were also revised down. Economists now believe that the economy grew at a 0.9% pace in the first quarter — down from 1.0% — and that it shrank by 0.2% in the final quarter of last year.
Though earnings were coming fast and furious during the week, they seemed to have far less impact on the market than the economic releases.
Looking ahead
Volatility continues, and that’s not what we want to see. A market that’s unsure of itself is a market that will continue to have us tossing and turning at night — if we let it.
However, if we break down the week’s market movements, we can emphasize why fretting about the day-to-day movements isn’t worth your time. On Monday, the S&P dipped nearly 2% on worries over financial companies, inspiring the talking heads to take off on a bearish charge. Tuesday and Wednesday, though, the market charged back largely on the stronger than expected consumer confidence reading, and by Wednesday evening the market was up over 2% for the week.
Thursday and Friday came along with renewed pessimism, this time largely over the state of the job market and peeled off 1.9% from Wednesday’s close. So at market close today, after the violent swings during the week, we stand at just about where we started. Considering that when we talk about the S&P index we’re talking about a collection of companies worth over $11 trillion, do the movements of the week sound like sober analysis by investors or gut reactions to whatever is in front of them at the moment?
There’s no reason to expect that the volatility will simmer down next week either. Earning will continue to pour out next and though we will have some major releases such as Procter & Gamble (NYSE: PG) and Cisco (Nasdaq: CSCO), I expect that the market will be less concerned with earnings until the major retailers start coming to the podium. That will start the week of the 11th and continue through the following week and will include everyone from Wal-Mart (NYSE: WMT) and Target (NYSE: TGT) to Nordstrom (NYSE: JWN) and Gap (NYSE: GPS).
What the market will be watching with eagle eyes next week is the Federal Reserve’s policy statement. The Fed meeting took on less significance the last time around because it was generally accepted that the Fed was done lowering rates and that it wasn’t ready to begin raising them yet. And when the market has a clear expectation of what will happen it tends to be much calmer.
This time around, though, there is somewhat less certainty. According to data from the Federal Reserve Bank of Cleveland, an overwhelming percentage of market participants believe that rates will be kept steady again. The probability of a 25 basis point rate hike is growing though and is looked at as an even greater probability in the September meeting, so the commentary, as well as the rate decision, will be watched closely.
It should be noted that rates are not the simple “down is good, up is bad” binary that they often seem to be interpreted as. Though lower rates are typically better for businesses and equity markets, the ability of higher rates to contain inflation is very desirable to keep the economy running smoothly. In addition, higher rates would almost certainly have a positive affect on the dollar and put downward pressure on the prices of oil and other commodities.
Since I’m not a clairvoyant and we aren’t a group that likes to make predictions — especially about short term events — we’ll have to wait and see what the Fed does. Regardless of the rate meeting outcome though, we still believe that retirement investors are best served by regarding the day-to-day market fluctuations as entertainment at most, and sticking to a steady, long-term oriented plan when it comes to investing their hard earned money.
