A Week in the Rearview – week ending 7/23/2010
In the headlines
A look at some of the market movers from the week:
- Nokia Siemens agreed to buy Motorola’s wireless networking business for $1.2 billion
- Carlyle and TPG agreed to buy Australia’s Healthscope for $1.7 billion
- Ireland’s credit rating was downgraded by Moody’s
- Nokia’s second-quarter profit fell sharply and the company is reportedly looking for a new CEO
- IBM announced executive changes along with better second-quarter profit
- Financier Carl Icahn is making a new run at Lions Gate
- Total U.S. government support of the financial system rose $700 billion over the past year to $3.7 trillion
- Apple continued to roll along with its fiscal third quarter earnings release
- A consortium of major oil companies is planning a system for containing deepwater oil spills
- Ben Bernanke called the economic outlook “unusually uncertain” but said the Federal Reserve won’t take additional action yet
- President Obama signed the financial reform bill into law
- An extension of unemployment benefits squeaked through Congress
- Green Dot showed some impressive pep after its IPO
- The U.K.’s GDP growth was a better-than-expected 1.1% in the second quarter
- The Euro fell as investors reacted to details about the European banking stress tests
- BP agreed to sell $7 billion in assets to Apache in an effort to raise money for the Gulf spill response
Commentary
After a stormy end to last week, optimism peeked back through the clouds this week as the S&P 500 index posted a 3.5% gain. A 1.1% slip on Wednesday was easily countered by four days in the black, including a 2.3% jump on Thursday. The gains pared the year-to-date loss on the S&P index to 1.2%.
Earnings led the charge as reporting companies seem to be posting a non-stop string of upside surprises. A broad range of companies managed to best Wall Street’s estimates from beverage hulk Pepsi, to tech titan Apple and drug giant Eli Lilly. If there was any cautionary lining to the earnings euphoria, it was the fact that some reporting companies, such as tech bell weather IBM, reported better-than-expected profits but showed soft revenue growth.
Meanwhile, there was plenty of action in Washington over the past week as President Obama put his signature on the 2,000-plus page financial reform bill. Though the bill is now officially law, changes will come slowly over time as bureaus and councils from the newly-created Consumer Financial Protection Bureau to the SEC get to work turning the often broad guidelines of the bill into new rules and regulations.
In other political news, Congress passed extended relief for the unemployed, a measure that’s been hotly debated as the desire to aid the jobless has clashed with concern over the nation’s massive deficit. Additionally, TARP Inspector General Neil Barofsky weighed in on the growth in financial sector funding from the government and the housing support programs. The IG wasn’t particularly positive on either, noting that federal support for the financial system has increased 23% over the past year “largely without congressional action,” and that participation in the Treasury’s housing programs has been “anemic.”
It was testimony from Federal Reserve Chairman Ben Bernanke though that drove the one down day of the week. Bernanke delivered a less-than-optimistic view of the U.S. economy, using the phrase “unusually uncertain” to describe the current state of affairs. However, what may have spooked investors more than the cloudy outlook was Bernanke’s mention that the Fed won’t be taking any additional accommodative action right now.
Finally, news from Europe on Friday was mixed as investors reacted to the announced results of the banking stress tests. Only seven of the 91 European banks failed the tests, a potential sign that the banking system is in good enough shape to weather the storm. The news was met with a bit of skepticism though, as some observers claimed the tests weren’t tough enough to really give a good gauge of the strength of the system.
Looking ahead
There will definitely be some economic reports to watch in the coming week. Through Wednesday we’ll see numbers on new home sales, consumer confidence, and durable goods orders. Current expectations show new home sales and durable goods orders rising, while consumer confidence slips. We’ll also get a look at the Federal Reserve’s beige book report, which looks at the economic condition each Federal Reserve Bank district.
In final two days of the week we’ll get numbers on initial unemployment claims, second quarter GDP, and the University of Michigan sentiment index. The GDP number will be an advanced reading on second quarter economic performance, a notable fact considering the revisions we’ve seen on the first quarter’s numbers. The report will likely be the cornerstone of the economic calendar next week though, as investors continue to look for signs that the economy is heading in the right direction. Estimates on what the number will look like vary considerably, ranging from close to 4% at banks like Credit Suisse to “in the 2% to 3% range,” as suggested by Boston Fed chief Eric Rosengren.
But while the GDP reading may put some motion in the markets — particularly if it’s significantly above or below expectations — earnings will likely be in the spotlight once again. The earnings calendar will continue to ramp up next week and we’ll hear reports from an army of major companies.
Through Wednesday the major reports will include Coach, Aetna, Alfac, BP, Deutsche Bank, DuPont, Lockheed Martin, Norfolk Southern, Nasdaq OMX Group, UBS, Under Armour, United States Steel, Valero, Western Union, ArcelorMittal, General Dynamics, Visa, Sprint Nextel, Boeing, WellPoint, and ConocoPhillips. Later in the week we’ll hear from ExxonMobil, Waste Management, Vale, Tyco, Raytheon, Motorola, MetLife, CME Group, Colgate-Palmolive, Amgen, ADP, Merck, Chevron, and Honda.
If earnings continue to top expectations the way they have thus far through reporting season, next week could get off to a good start. The final tally for the week, however, may depend on how investors react to the GDP report. Meanwhile, we could also see some caution in the markets as investors await the end-of-month numbers — including employment readings — that will be released the week after next.
About Smart401k
Smart401k is a Web-based investment adviser providing unbiased advice to help employees invest in their employer-sponsored retirement plans. Smart401k provides service to almost 11,000 clients who collectively have more than $1.5 billion in assets. Individuals receive personalized investment recommendations based on the funds in their plan and support of professional investment advisers available to answer all investment questions. Based in Overland Park, KS, Smart401k can be found at Smart401k.com.
