A Week in the Rearview – week ending 10/30/09
In the headlines
A look at some of the market movers over the past week:
- ING Group announced plans to spin off its insurance business and issue stock to pay back half of its government bailout
- A survey from the National Association for Business Economics stoked hopes for an employment recovery
- Real estate lender Capmark filed for bankruptcy
- Private equity giant Blackstone may be preparing an IPO for theme park operator Merlin
- PIMCO’s Bill Gross painted a relatively dour picture for the U.S. recovery
- All signs seem to point to strong growth from the Chinese economy
- A third bailout may be in the works for auto lender GMAC
- U.S. consumer confidence fell in October
- Barney Frank unveiled the first detailed legislation to deal with “too-big-to-fail” financial institutions
- Agreements with Carl Icahn and Goldman Sachs may pave the way for a pre-packaged bankruptcy for the struggling lender
- The International Monetary Fund lifted its growth estimates for Asia
- The U.S. economy logged surprisingly robust GDP growth in the third quarter
- Economic worries sank stocks at week’s end
Commentary
The S&P 500 index fell again this week, this time losing a hefty 4% by week’s end. A heady 2.3% rally on Thursday was all that stood between the 4% decline and an even larger dip. The index struggled throughout October and ended the month with a 2% loss, the first monthly loss in the past eight months. The S&P is, however, still up 14.7% year-to-date and 53% from the lows in March.
Surprisingly, investors swept earnings reports into a dark corner this week. Though reporting companies continued to issue upside surprises, investors appear to already be looking past this earnings season and concentrating on economic predictors.
The two major market movers during the week came from the U.S. GDP numbers and the U.S. consumer. The GDP report on Thursday sent stocks soaring as U.S. economic growth clocked in at 3.5%, above the 3.3% expectation. Many investors took this as sign that one of the worst recessions in U.S. history is coming to an end. This was the first quarter of economic growth since the second quarter of 2008.
Some, however, met the GDP report with skepticism, noting that the government’s “cash for clunkers” program was a significant part of third quarter growth, as were other government programs such as the $8,000 tax credit for first time homebuyers. Cash for clunkers has already ended and, unless it is extended, the homebuyer tax credit is scheduled to end in November.
Adding to pessimism was concerns over U.S. consumers. The University of Michigan’s consumer confidence measure fell from 73.5 to 70.6, personal spending contracted 0.5%, and personal income remained unchanged. While all numbers were in line with estimates, investors read the results as a sign that the economy is not as healthy as the GDP report suggested. Fear over sluggish consumers helped spark the 2.8% sell-off in the S&P index on Friday.
Looking ahead
As with last week, the most important thing to watch in the coming week will be investor sentiment. This past week the 2.3% rally on Thursday followed by the 2.8% rout on Friday showed just how unsteady the market is right now. While we can likely expect a mix of good and bad news in the coming week, the key to the market’s performance will be what investors choose to focus on.
With the month of October coming to a close this weekend, the economic calendar will be stacked next week. Starting off the week we will see construction spending, the Institute of Supply Management index, factory orders, and auto sales. The back half of the week will bring some even more notable announcements including the ADP employment report, the Federal Reserve’s rate setting decision, initial unemployment claims, average work week, and the unemployment rate.
With concern swirling about U.S. consumers at the end of this past week, employment numbers will very likely be the focus next week. We’ll get an early read on the employment situation early in the week with the ADP numbers, but that report will be overshadowed by the unemployment rate announcement at the end of the week. Currently the market expects the unemployment rate to increase to 9.9% from 9.8% in September. Ancillary reports such as average work week, initial unemployment claims, and hourly earnings should also get some attention.
While it’s highly unlikely that the Fed’s rate setting decision will surprise anyone — it’s expected to stand pat at the current 0% to 0.25% range — the commentary that the Open Markets Committee provides with the decision will be in focus. Investors will be looking to this for a read on the Fed’s assessment of the economy’s health.
Earnings will also continue to pour in next week, though if this past week is any signal, the market is unlikely to take too much notice. Monday and Tuesday’s major reports include Chesapeake Energy, Clorox, Ford, Humana, Sysco, Archer Daniels Midland, Emerson Electric, Kraft Foods, MasterCard, Tenet Healthcare, Teva Pharmaceutical, St. Joe Company, and UBS. Wednesday will bring Ambac Financial, ADP, Cisco, Comcast, Foster Wheeler, Garmin, Goldcorp, Marsh & McLennan, Molson Coors, News Corp., Pulte Homes, Qualcomm, Allstate, Time Warner, Transocean, Tyco, United Online, Vonage, WellCare Health, and Whole Foods.
Thursday will follow with Activision Blizzard, CBS, CVS Caremark, Dr. Pepper Snapple, International Game Technology, JDSU, MetroPCS, MGM Mirage, NVIDIA, SandRidge Energy, Sara Lee, Scripps Networks, Sotheby’s, Spectra Energy, Starbucks, Sunoco, DirecTV, Nasdaq OMX, Thomson Reuters, Toyota, Unilever, and Wendy’s. And Friday will finish the week with Perot Systems, Blackstone, and PMI Group.
