Smart401k Blog

In the headlines

A look at some of the market movers over the past week:

• Finance officials from the G-20 nations agreed to tougher banking rules
• AIG continues to sell off some of its smaller assets
• First Solar has laid plans to build the world’s largest solar plant in China
• NYSE sold off stakes in its Amex exchange to a handful of major brokers

• Moody’s said the AAA ratings for the U.S. and U.K. are not currently at risk
• Consumer credit fell a record amount in July
• The government may soon start to phase out some bank aid
• The Federal Reserve’s beige book report showed continued signs of stabilization, even though consumer spending remains weak
• OPEC opted to hold production levels steady in an effort to keep prices in their current range
• Though Steve Jobs made an appearance at Apple’s recent event, investors weren’t thrilled with the product announcements
• Homeowners continue to foreclose at a breakneck pace
• China showed more signs of economic recovery
• Morgan Stanley CEO John Mack will step down on January 1st
• Consumer sentiment came in higher than anticipated
• FedEx raised its outlook for its fiscal fourth quarter

Commentary

Investors seemed to have come out of the Labor Day holiday in good spirits. The S&P 500 index spent another week in the black with an overall 2.6% gain for the week. Though the market slipped slightly on Friday, three solid up days to begin the week led to a winning week. The S&P index is now up 15.4% for the year and over 54% from the March 9th low.

While there were quite a few notable events this week, let’s take a few moments to consider one of the more notable releases for the week — the Federal Reserve’s beige book report. The beige book is a collection of economic indicators from the various Federal Reserve Bank districts and is intended to give an overall picture of the U.S. economy.

Last week’s beige book report offered a picture of an economy that seems to be on the mend. The Fed separates their report into six principal areas: consumer spending, real estate and construction, nonfinancial services, banking, manufacturing, employment, and agriculture.

As might be expected, all areas are still struggling in certain parts of the country. Nearly all districts, however, reported either stabilizing activity or a reduction in the rate of decline in every category. This can be read as a strong sign that even if the economy isn’t ready to launch back into growth mode that at least we’re seeing recessionary conditions fade.

Of particular interest in the report is consumer spending, since the consumer sits in the driver seat of the U.S. economy. Not surprisingly, the report from most districts was that consumer spending has remained weak. Back-to-school sales and the government’s cash for clunkers program helped spur sales in some districts, though Philadelphia, Chicago, Cleveland, and San Francisco all reported that consumers seem to be focused primarily on buying essentials and are avoiding big-ticket and discretionary items.

As we move forward, consumer spending will be seen as a key measure of the pace of economic recovery. While we probably can’t expect to see spending recover to the same levels as we saw prior to the recession, if recovery does continue to arrive in other areas of the economy we should begin to see consumers lose some of the extreme caution that recession has inspired.

Looking ahead

The second quarter earnings season is now in the past and all eyes will soon be fixed on the upcoming end of the third quarter. In the meantime, though, we will be treated to a smattering of important earnings announcements from companies that don’t report on the normal schedule. Next week notable earnings reports will come from Adobe, Best Buy, Oracle, Discover Financial, FedEx, and Palm.

Economic news will keep the market hopping in the coming week. Kicking things off on Tuesday, we’ll get the producer price index, retail sales, and business inventories. Wednesday will bring the consumer price index and Thursday will offer up building permits, housing starts, and initial unemployment claims.

The two reports that will likely grab the most attention are retail sales and the consumer price index. As noted above, the consumer has been one of the weak points in the U.S. economy, so any signs of a recovery in consumer spending would be very encouraging for the market. Currently the market is expecting that retail sales increased 1.9% last month after a 0.1% decline in July.

Consumer prices, meanwhile, give us a picture of how the Federal Reserve’s policies are feeding through the financial system. A low-to-moderate level of price inflation — as measured by the CPI and PPI — would be a sign that the Fed’s policies are doing what they’re supposed to do. However, the challenge is for the Fed to make sure that it doesn’t leave its current accommodative policies in place for too long and allow inflation to spike. Current expectations are that CPI increased 0.3% in August after a flat month in July.

This entry was posted on Sunday, September 13th, 2009 at 3:09 pm and is filed under SmartUpdate Market News. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.