A Short Week
I did not know until Monday that Tuesday the 3rd was a half day in the market – so it was a nice surprise. Hope everyone enjoyed the heat, lack of power and the fireworks. I did.
The good vibes from the European Union summit that helped June end up with a substantial rally is being replaced by caution on Wall Street – again. Fears about the global economic outlook prompted the normally conservative European Central Bank (ECB) to cut its key lending rate by 25 basis points to 0.75%. I read over the weekend that this is a record low.
Here’s how the market ended up for the week. NOTE: we will have a 2nd Quarter review in our newsletter that will be published separately.
On Friday, the U.S. government reported June’s employment numbers. Everyone from investors to job seekers was disappointed. The nonfarm payrolls rose by 80,000. The nonfarm payroll number is meant to represent the number of jobs added or lost in the economy over the last month (not including jobs relating to the farming industry). This was less than the consensus forecast of 90,000. The unemployment rate held steady at 8.2%. Most economists say that we need to see an average of about 150,000-175,000 jobs created per month to absorb population growth AND bring down the unemployment rate.
Simply put, the problem is there just isn’t much interest in hiring new employees amid an uncertain economic climate.
Additionally, everyone is speculating that this could be the start of a new recession. Here are some observations:
1. In both 2010 and 2011, the world economy was in the middle of a global interest rate tightening cycle. That’s not the case today (according to Ed Hyman at ISI) as there have been 203 stimulative policy initiatives announced over the past 10 months…and more are likely to come.
2. There have been some key statements by powerful people. Ben Bernanke (Fed Chairman), stated that “we are prepared to do what’s necessary.” Mario Draghi (ECB President), said “we are not running short of policy options.”
3. In both 2010 and 2011, U.S. housing was still close to the bottom. Now, mortgage rates are at a record low of 3.62% last week versus around 4.60% on average in mid-2010/2011. Also, homebuilder shares have surged +120% over the past 9 months.
4. The global Consumer Price Index (CPI) accelerated from 0% in 2009 to +2% in 2010, and then to +4% in 2011. The global CPI in 2012 has already slowed back down to +2%.
Finally, second quarter earnings season unofficially begins after tonight’s close. Profit forecasts have been coming down along with the backdrop of slowing U.S. and global growth. Companies that have pre-announced (offered guidance) have mostly been cutting estimates.
As the season progresses, watch for comments from the multinationals about developing headwinds from Europe and emerging markets. Reports from the major industrials start to trickle in on the week beginning July 16th but will pour in the following week. Financials are in the spotlight early on.
We’ll be watching.
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David B. Armstrong, CFA
President & Co-Founder
Dave got into the industry when he discovered his passion for finance in his mid-20’s. He’s a combat veteran and served as an officer in the United States Marines Corps on both active duty and in the reserves, retiring at the rank of Lieutenant Colonel. While serving on active duty, Dave was unable to spend money on deployments, so he became a self-taught investor. Along with a few bucks cash as a bouncer, his investing performance grew to be good....
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