A Week in the Rearview – week ending 7/2/2010
In the headlines
A look at some of the market movers over the past week:
- Though trouble continued in the Gulf, BP’s shares posted their first weekly gain since the Deepwater Horizon explosion as takeover talk gained momentum
- Google showed a softer side in its showdown with China
- The Supreme Court ruled on changes to Sarbanes-Oxley
- The high court also refused to review a landmark case against the country’s tobacco companies
- Electric carmaker Tesla hit the public markets with its initial public offering
- Celgene agreed to buy Abraxis for $2.9 billion
- Lawmakers decided to forgo a tax on the largest banks in an effort to ensure passage of the financial reform bill
- Rumors circulated that Verizon would start offering Apple’s iPhone beginning next year
- The House of Representatives approved the financial reform bill, but the vote in the Senate was postponed
- Google upped its presence in travel search with the $700 million acquisition of ITA Software
- Australia’s government scaled back its plans for a much-debated mining tax
- The employment numbers came in weaker than expected
Commentary
It was a dismal week for the equity markets. The S&P 500 index fell five straight days and a big 3.1% dip on Tuesday drove a 5% drop in the index for the week. Wednesday closed the books on both June and the second quarter, showing a 5.4% and 11.9% loss for those periods, respectively. The S&P 500 is now off 8.3% year-to-date.
Pessimism over the state of the economic recovery gained momentum this week as investors increasingly questioned whether the pace of the recovery was enough to justify the stock market’s gains from 2009′s bottom. Early in the week a lower-than-expected reading on consumer confidence hit the markets hard and sent the S&P skidding more than 3%. While consumer confidence is a very important component of the recovery, the market’s sharp drop on the news also showed how skittish many investors are right now.
The news didn’t improve as the week went on. Wednesday gave an early peek at the employment situation, as ADP released its reading on payroll change. ADP’s report showed 13,000 jobs added in June, well short of the 61,000 that the market expected.
On Thursday, we got more ugly employment data as initial unemployment claims increased from the prior week and were above expectations. We also saw a lower-than-anticipated reading from the Institute of Supply Management and a huge drop in pending home sales that same day.
And, of course, Friday brought us the rest of the employment picture as the government released its payroll numbers. As has been the case in prior months, the raw unemployment number gave a rather misleading picture of the employment situation as its decline from 9.7% to 9.5% masked the lackluster numbers elsewhere in the report.
In June, nonfarm payrolls declined by 125,000, a loss driven primarily by 225,000 temporary Census workers that were laid off. In the private sector, 83,000 jobs were added. This however, was below the expectations of the market and widely held up by commentators as a pace far too low to support a strong recovery. In addition to this disappointment, both hourly earnings and the average workweek unexpectedly declined in June.
For those looking for bright spots in the economy, there were some counterpoints over the past week including growth in personal spending, a better-than-expected reading from the Chicago Purchasing Manager’s Index, a lower-than-expected drop in construction spending, and the fact that while the employment numbers were disappointing to many, the economy did add jobs during the month.
In addition, in possibly one of the most controversial suggestions of the week, former Federal Reserve Chairman Alan Greenspan said during a CNBC interview that the U.S. economy is undergoing a “typical pause” in the recovery process. The statement sparked much debate, with some commentators jumping on board with Greenspan’s apparent optimism, while others countered the suggestion, noting that the recession that we’re recovering from is far from typical.
Looking ahead
Thanks to the Fourth of July holiday, it will be a holiday-shortened week next week. With any luck, the holiday will help cool some of the pessimism that’s been infecting the markets in recent months.
Of course while we could hope that holiday merriment might encourage a more optimistic attitude, what is more likely to change the market’s direction are more hopeful data. Unfortunately, we’ll be looking at very light economic and earnings calendars next week with initial unemployment claims likely to be the only real market-moving report.
However, we may need the space next week to catch our breath before the second quarter earnings season kicks off. On July 12, Alcoa will kick off reporting season, and the results from the first few weeks of earnings reports are likely to have a huge impact on the market’s direction. Investors will be closely watching not only the second quarter results, but also the company projections for the quarter and year ahead. Strong reports could be just what the doctor ordered for putting some pep back in the market, while high levels of management caution may simply feed the already high levels of pessimism.
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