A Week in the Rearview – week ending 2/26/10
In the headlines
A look at some of the market movers over the past week:
- The much-awaited healthcare summit took place in Washington, but it’s unclear that a bipartisan bill is any closer
- Schlumberger agreed to acquire Smith International for $11 billion
- Many European countries may have obscured debt levels through complex financial transactions
- A meeting among U.S. governors was split on the merits of government stimulus spending
- New credit card rules kicked into effect
- President Obama unveiled his healthcare reform proposal
- Intel is working on a $2 billion investment fund that would target U.S. companies
- RR Donnelley agreed to buy Bowne for $481 million
- Xerox is suing Google and Yahoo over Internet search patents
- General Motors may wind down its Hummer brand after efforts to sell it fell through
- The SEC voted to limit short selling
- Toyota executives were chastised in front of the U.S. Congress
- In his Congressional testimony, Ben Bernanke stressed that interest rates should stay low for the foreseeable future
- Sales of both new and existing homes fell unexpectedly
- The Treasury may introduce new measures to try and stem residential foreclosures
- AIG reported a much smaller loss than in the previous year
- Fourth quarter GDP growth estimates were bumped to 5.9%
Commentary
It was a relatively boring week on the markets, but by the close of trading on Friday the bears had gotten the best of it as the S&P 500 finished with a 0.4% loss. On a more positive note, trading in February brought the index up 2.9% after a 3.7% loss in January. The S&P is now down 1% for the year.
In his semi-annual testimony before Congress, Federal Reserve Chairman Ben Bernanke made clear that the Fed would continue to keep its main target rate at the low levels it is currently at for the foreseeable future. In recent weeks, the Fed has started to pull back some of the emergency programs that it had put in place to help shore up the U.S. financial system during the worst of the crisis. The Fed also raised the rate it charges banks for direct emergency loans.
Despite these moves, Bernanke made clear that he still views the U.S. economy at the beginning of a recovery and is still very concerned about employment and the housing market. His hope seems to be that low rates will continue to allow a broader economic recovery that will start to create more jobs and encourage consumer spending.
In related economic news, the government upped its estimate of fourth quarter GDP growth from 5.7% to 5.9%. While the increase may seem like a positive sign, many experts and commentators have emphasized that much of the jump came from business spending to bolster depleted inventory levels. The concern is that without a resurgence in consumer spending, high, or even moderate, growth rates may not be sustainable.
And though the President’s healthcare summit may not have had much of a direct impact on the markets, it certainly provided plenty of news fodder. The summit was hoped to encourage bipartisan support for some sort of healthcare reform, but the end result seemed to leave the process at square one.
If there’s any significant development for investors from the healthcare happenings during the week, it was the proposal that President Obama introduced prior to the summit. As part of the funding for the proposal, the President wants to raise capital gains taxes to 22.9%, up from the current 15%.
Looking ahead
With the month of February coming to a close over the weekend, next week’s economic calendar includes many of the month-end releases. Monday we’ll see personal income and spending, construction spending, and the Institute of Supply Management’s main index. Wednesday will bring the ISM services report, the Fed’s Beige Book, and an initial read on employment with ADP’s employment report.
Thursday we’ll have more employment data by way of the weekly initial unemployment claims as well as fourth quarter productivity and January factory orders and pending home sales. Finally, on Friday we’ll get a full batch of government employment data, including the unemployment rate.
Employment will obviously be the focus point for next week, with the unemployment rate being the piece of data the market will likely key on. Current expectations show the rate increasing from 9.7% to somewhere between 9.8% and 10%. Initial unemployment claims, which are a more coincident indicator than the unemployment rate, shouldn’t be ignored though. Expectations for the coming week are a wide range of as low as 475,000 to as much as 515,000.
Investors may also take some time to consider what the Federal Reserve has to say in its Beige Book report. The report has individual Fed governors weigh in on the economic conditions in the Fed regions. It seems likely that the upcoming report will sound a lot like previous reports — that is, suggesting that there is overall economic improvement, but that select areas such as consumer spending and housing continue to lag.
