A Week in the Rearview – week ending 7/30/2010
In the headlines
A look at some of the market movers from the week:
- BP’s CEO stepped down, but gave the company reason to cringe as he did
- BP announced a $17 billion second-quarter loss
- IBM came under antitrust scrutiny in the European Union
- A banking rule-setting committee eased its newest set of proposals
- Steel giant ArcelorMittal reported a second-quarter profit of $1.7 billion
- Avis fired the latest volley in the battle for control of Dollar Thrifty
- The fiscal picture in California continues to be troubling
- Moody’s wants to see a credible plan from the U.S. to deal with its debt
- The Federal Reserve’s Beige Book report showed continued economic expansion, but was met with skepticism
- Disney is selling Miramax for $660 million
- Oracle is being sued by the Department of Justice for allegedly overcharging the U.S. government
- The International Monetary Fund said that the U.S. financial system is still at risk
- Regulators shut five banks on Friday, bringing the year’s total to 108
- GDP growth for the second quarter was slower than expected
Commentary
It was a pretty sleepy week for the markets as a moderate gain on Monday gave way to three straight down days, giving the S&P 500 index a 0.1% loss for the week. Even with the slight loss on the week, the S&P 500 still managed a brisk 6.9% gain for the month of July. The year-to-date loss on that index now stands at 1.2%.
The week’s market action was driven by a mix of economic and corporate news. Earnings have continued to play a big role as investors try to decipher whether the encouraging reports suggest that the economy may be in better shape than some of the economic data might suggest. So far, roughly 75% of the S&P 500 companies that have reported earnings have beaten Wall Street’s earnings expectations.
Investors have mostly been cheered by the reports, though there has been some skepticism about the sustainability of the performance. The jumpiness in the market has been very evident in some of the in-line and below consensus reports. Sharp selloffs followed less-than-outstanding reports from some tech players like Akamai and Symantec.
But while it was the charging earnings numbers that started the week off on a upbeat note, economic reports helped temper investor sentiment over the balance of the week. Wednesday’s Beige Book report from the Federal Reserve led to investor disappointment as the report noted a slowing pace of growth from a few of the Fed’s districts.
It could be questioned though, whether the Beige Book fallout did more to highlight a tepid economy or a general focus on the yet-lagging segments of the economy. The report showed that most Fed districts are still showing positive growth momentum and that while banking and real estate continue to provide a drag, manufacturing and consumer spending have been moving in the right direction.
Capping the week, the Commerce Department released its advanced estimate of second quarter GDP growth. Growth in the second quarter slowed to 2.4% from 3.7% in the first quarter. The pace of GDP growth declined largely as a result of an increase in imports and slower inventory purchases by businesses.
Residential real estate may seem like a surprising strength during the quarter, but that largely reflects homebuilders rushing to build and sell houses prior to the expiration of the homebuyer tax credit. The contribution from government spending is likewise a GDP component that we probably don’t want to rely on for future growth. More encouraging areas of positive momentum in the second quarter were exports and business investment in fixed capital (think buildings, machinery, and software).
Looking ahead
With the sun setting on July, next week will bring a flood of month-end economic reports. On Monday both construction spending and the Institute for Supply Management’s index report could get some attention. Tuesday we’ll hear about personal income, personal spending, factory orders, pending home sales, and auto sales.
The balance of the week will likely focus on the most important area of the month-end reports: employment. On Wednesday, ADP will release its measure of employment change and it will be followed on Thursday by the weekly initial unemployment claims. Friday will bring the government’s tally on nonfarm payrolls as well as the unemployment rate, hourly earnings, and the average workweek.
On the whole, it doesn’t look likely that the data will wow investors. Construction spending, the ISM index, personal income, personal spending, factory orders, and pending home sales are all expected to either fall, or grow at a slower pace than the prior month. The payroll additions announced by ADP are expected to bump up to 25,000 from 13,000 last month, but that growth is hardly the brisk pace that the markets would like to see.
The government’s payroll calculation is expected to show more losses, though that will once again be muddied by layoffs of temporary census workers. Payroll additions among private firms, however, are expected to be roughly flat with last month. Hourly earnings are expected to increase, while the average workweek is seen holding steady.
While economic data may concern investors, earnings data could continue to provide a counterbalance. The earnings calendar will be packed again next week and there seems little reason to expect that the results won’t continue to top expectations at a rate similar to what we’ve seen so far.
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