A Week in the Rearview – week ending 8/14/09
In the headlines
A look at some of the market movers over the past week:
- Mining giant Rio Tinto was accused of commercial espionage by China
- Treasury Secretary Timothy Geithner requested that the national debt limit be raised
- The Congressional Oversight Panel reported that smaller U.S. banks may need $12 billion to $14 billion of new capital
- State Street revealed that its reserves for legal costs associated with investments gone awry may not be enough
- Barnes & Noble acquired Barnes & Noble College Booksellers for $596 million
- Bernie Madoff’s CFO pled guilty to fraud
- Productivity jumped more than expected
- CIT shares took a hit when the lender delayed its quarterly report
- UBS settled with the U.S. government over secret accounts
- Germany and France both posted positive GDP growth in the second quarter
- The Federal Reserve maintained its target rate at 0% and 0.25%
- Home foreclosures continue to set records
- China dropped plans to require internet filters to be installed on all new computers
- Retail sales came in below expectations
- Colonial BancGroup became the largest U.S. bank failure this year
- Hong Kong posted significant positive growth in the second quarter
Commentary
In a slight reversal of the gains posted over the past few weeks, the S&P 500 index closed the week down 0.6%. Three down days during the week were enough to offset gains on Wednesday and Thursday. The index is now up 11% year-to-date and 48% above the low point hit in March.
The week was largely a story of mixed economic data and concerns over the speed of the stock market recovery. To date, much of the gains in the market have been driven by economic data that has shown slowing declines and promise that the recession is reversing its way into recovery.
As we proceed further into this gray area between recession and recovery, investors seem to be looking more and more for actual signs of growth as opposed to just signals that declines are slowing. The data received by the market this week gave investors a taste of both sides of the ongoing push-pull between recession and recovery.
Productivity posted a stronger-than-expected rise, which is often a precursor to recovery, and the Federal Reserve noted a stabilization in economic activity when it announced its rate-setting decision. At the same time, consumers showed a reluctance to believe in recovery quite yet as retail sales came in lower than expected and consumer confidence posted a surprise drop.
Amid the mixed economic data, debate continues to rage around the pace at which the stock market has recovered. Already up nearly 50% from its low point, the valuation of the S&P index has already topped a number of historical comparisons. While one side argues that the gains we’ve already seen — and then some — are justified by the pending onset of recovery, the other counters that gains have come too quickly and that recovery may be a slow, plodding process.
Looking ahead
Next week’s earnings calendar will still be very full, but earnings are largely taking a back seat at this point. As I noted last week, reporting companies that sell consumer goods will get the most attention, and there are plenty of those companies that will provide results next week.
Among the consumer-oriented earnings reports will be Lowe’s, Home Depot, Saks, Target, TJX Companies, BJ’s Wholesale, Gymboree, Limited Brands, Aeropostale, Gamestop, Gap, Pacific Sunwear, Ross Stores, Sears Holdings, and AnnTaylor.
Coming off of a heavy week of economic reports, that calendar will slow down next week. Building permits, housing starts, existing home sales, and the producer price index will likely get the most attention, but are unlikely to make too many waves in the market. The producer price index may get extra attention as it reflects the Federal Reserve’s efforts to get money freely flowing through the economy again. Core PPI, which excludes the impact of volatile items like energy, is expected to post a 0.1% increase.
Without too many major scheduled events next week, the primary focus will likely be on the debates over the economy and stock market that have been ongoing. Expect to see continued back and forth about how to read recent economic releases and whether they signal a pause in an ongoing recession or an actual turn in the economy. Likewise, market analysts will continue to evaluate the likelihood that valuations have gotten ahead of potential profit growth and need to give back some of their recent gains.
