A Week in the Rearview – week ending 5/22/09
In the headlines
A look at some of the market movers over the past week:
- Bank of America revealed that it has raised $13.5 billion from stock sales over the past two weeks
- Election results sent India’s financial markets soaring
- Small and medium sized banks could still have substantial pain ahead
- Minutes from the Federal Reserve’s latest meeting revealed a lowered U.S. outlook
- Large banks are beginning to line up to pay back TARP loans
- American Express announced another large round of layoffs
- President Obama signed new legislation regulating how credit card issuers can operate
- Japan’s economy shrunk at a record pace in the first quarter
- Standard & Poor’s issued a warning on the outlook for the UK’s economy
- Former Fed Chairman Alan Greenspan had some bearish words on banks
- Florida’s BankUnited collapsed in the largest bank failure so far this year
Commentary
A big 3% gain on Monday helped the market shrug off four straight days of losses to still finish 0.5% in the black for the week. Early gains most days of the week gave way to late day pessimism that led to small losses Tuesday through Friday, but the market still managed to make up a bit of ground after shedding 5% the previous week. The S&P 500 index is now down 1.8% for the year, but up 31% since bottoming out in early March.
Contributing to some of the pessimism during the week was the release of minutes from the Federal Reserve’s meeting in late April. While the Fed decided to keep rates steady and expand its purchases of Treasuries, it also revealed a more pessimistic outlook on the prospects for the economy over the rest of this year and next. The Fed lowered its estimate for GDP growth in 2009 and 2010 and boosted its expected unemployment rates.
While it may not have had the same market impact as the Federal Reserve’s economic outlook, the new regulations on credit cards were another major event of the week. The regulations were designed to help credit card consumers avoid certain fees and unexpected interest rate hikes. Some applauded the changes, but there was a substantial amount of coverage about the potential for tighter overall consumer credit as a result of the regulations — a side effect that could adversely impact the economy.
On the whole, though, investors seemed to be cautious during the week. Heading into a three day weekend this may not be surprising, but much of the caution could be due to substantial gains the stock market has made over the past few months. Investors may be waiting for further information that will either confirm that recovery has set in or suggests that share prices got ahead of economic realities.
Looking ahead
It will be a holiday-shortened week next week and we’ll also begin to see earnings slow down before being turned down to a trickle the week after next. Though there are a limited number of major earnings releases slated for the week much of the action will come from retailers which, as a group, could be worth watching to gauge if there has been any life in consumer spending.
There will be a few economic releases worth watching next week. Housing remains a key factor in the economic slump and next week will bring April numbers for both existing and new home sales. Both are expected to improve. Both consumer confidence and the University of Michigan’s consumer sentiment reading are also expected to show gains next week.
The 5.5% annualized rate of decline for first quarter GDP that the market is expecting to see next week may not sound very good, but it would be a notable improvement from the 6.1% rate of decline in the fourth quarter.
“Digestion,” however, will be the key word for next week. Excitement over the lower rate of economic declines sent shares soaring between March and May. Now investors appear to be taking a step back and approaching the market more cautiously. Conviction that the economy is setting down firm roots to continue growing could boost shares further. Concern that recovery will be a long, slow process, however, could lead market indices to — at least for the short term — give up some of the recent gains.
