A Week in the Rearview – 7/31/09
In the headlines
A look at some of the market movers over the past week:
- Federal Reserve Chairman Ben Bernanke spoke directly to Americans and defended the Fed’s actions in a PBS special
- Ericsson paid $1.1 billion for the wireless assets of bankrupt Nortel Networks
- Time Warner filed with the SEC to spin off its AOL unit
- A new report from the Commodity Futures Trading Commission blames traders for last year’s oil spike
- U.S. Treasury secretary Tim Geithner assured Chinese officials that the U.S. would reign in its budget
- Bank of America said it may close up to 10% of its branches as customers switch to online and phone banking
- New home sales registered an 11% jump from May to June
- Microsoft and Yahoo inked a search deal
- Sprint agreed to acquire Virgin Mobile USA for $483 million
- IBM agreed to acquire SPSS for $1.2 billion
- Agilent Technologies agreed to acquire Varian for $1.5 billion
- New Jersey is suing Merrill Lynch over $300 million in preferred stock that the firm sold the state
- Consumer confidence unexpectedly fell in July
- American Express officially exited the TARP program
- The Fed’s Beige Book provided some optimism for the markets
- Banking bonuses came back to the forefront as politicians reacted to billions paid out, in response the House passed a bill that would limit bonus payouts
- The government’s “cash for clunkers” program was stopped after it went through its allotted $1 billion
- A healthcare reform bill will be on its way to the House in the Fall
- Five banks were closed by the FDIC, bringing the year’s total to 69
- GDP declined at a slower-than-expected rate in the second quarter
Commentary
Though the S&P 500 index tacked on just 0.8% for the week, the month of July finished with the market in full-on rally mode. The S&P ended July up 7.4%, bringing the year-to-date gain to 9.3%. The index is now 46% above the low hit in early March.
Better-than-expected earnings reports sparked the rally when the second quarter earnings season got into full swing and the continuation of the trend has kept up the momentum. The moderated gains this past week, however, suggest that investors are considering just how far these earnings reports should propel the market. Though earnings have largely been above analysts’ estimates the optimism has been tempered by the soft revenue numbers from many reporting companies.
Earnings weren’t the only bullish sign for the week though. Kicking off the week, new home sales posted a surprising 11% bump between May and June and home price declines moderated more than expected. Many experts see a stabilization of the housing markets as a key driver of an economic recovery. At the same time, the Federal Reserve added some positive sentiment through its Beige Book report and GDP contracted less than experts anticipated. The recent spate of merger and acquisition activity also continued, which is a good sign.
These positive signs were tempered by some yet-sluggish signals from the economy. Consumer confidence fell from June, durable goods orders fell more than anticipated, and initial unemployment claims were higher than forecast. There was also some pushback on the excitement over the GDP report because so much of the economic activity came from the government. Taken together these reports were important reminders that the economy is still not out of the woods.
While earnings took the main stage this week, the government grabbed a considerable amount of spotlight. The White House continued to press on with its proposed healthcare overhaul, while a number of lawmakers started kicking up dust again over compensation at the banks receiving federal aid. The government’s “cash for clunkers” also hit the headlines as a strong response for the program led to a quick draining of the funds allotted for it. Heading into the weekend, the program was given another $2 billion to keep it up and running.
Looking ahead
Next week will be another week chock full of earnings reports. Monday’s calendar includes Centex, Clorox, Humana, MGM Mirage, Molson Coors, and Pulte Homes. Tuesday will follow with Archer Daniels Midland, Church & Dwight, CVS, D.R. Horton, Denny’s, Duke Energy, Electronic Arts, Emerson Electric, Kraft, Marvel Entertainment, Sotheby’s, Toyota, UBS, and Whole Foods.
Wednesday’s reports include Cisco, Foster Wheeler, Garmin, PG&E, Polo Ralph Lauren, Procter & Gamble, Prudential, and Allstate. Thursday will feature Beazer Homes, Blue Nile, CBS, MBIA, MetroPCS, NVIDIA, Sirius Satellite, Blackstone Group, Thomson Reuters, and Unilever. And finally, Friday will round out the week on a quiet note with few high profile releases.
The market seems to have largely characterized the second quarter earnings season as better than anticipated on the earnings side, if a little soft on the revenue side. Overall, the reaction to earnings has been very positive. Looking ahead less emphasis may be put on the additional reports coming out and more emphasis will go towards where the market should be in light of the new information. Earnings reports from companies that specifically reflect consumer spending may be an exception as investors look for signs of life from consumers.
With the close of the month of July we’ll have a heavy economic calendar to look forward to next week. Auto and truck sales at the beginning of the week are likely to be highlighted because of the cash for clunkers program. More importantly though, we’ll have the ISM report on Monday, pending home sales and personal income and spending on Tuesday, and the unemployment rate on Friday. The most important of these releases will be Friday’s unemployment number, which is expected to tick up slightly from 9.5% in June to 9.6% in July.
With a big July rally now in the books, investors have a lot to mull over in the new month and much debate over the sustainability of July’s gains should be expected.
