Double Dip, No… Soft Patch, Yup

By David B. Armstrong, CFA | Aug 02, 2010 | Weekly Market Commentary

July ended up being the best month of the past year for the S&P 500 when it posted a 6.9% return for the month.  The combination of good earnings reports and decent economic news contributed to the month-long rally.  However, the market action last week was basically flat as the Gross Domestic Product was released showing economic growth had slowed from 3.7% in the first quarter of 2010 to 2.4% for the second quarter.

For the week, the Dow Jones Industrial Average gained 0.40% to finish at 10,466, the S&P 500 Index lost -0.10% to finish at 1,102 and the Nasdaq Composite Index lost -0.65% to finish at 2,255.  The Russell 2000, which measures smaller capitalization stocks, was flat. For July, the Dow Jones Industrial Average gained 7.1%, the S&P 500 Index gained 6.9%, the Nasdaq Composite Index also gained 6.9% and the Russell 2000 gained 6.8%.

In our opinion, the data we saw last week was evidence that we are in a soft patch and not in a double dip recession.  The common definition for a double dip recession is when there is another recession within a year of the previous one ending.  Last week’s GDP report (which was only a little bit worse than what everyone was expecting) showed that we have gone a year without any contraction.   As we stated last week, the Bureau of Economic Analysis revises all GDP data back 3 years every July.  The trailing 4 quarters were reported as follows: 2009 Q3 +1.6%, 2009 Q4 +5.0%, 2010 Q1 +3.7%, 2010 Q2 +2.4%.  Growth was revised down a little for Q3 and Q4, but the Q1 2010 was revised up from +2.7% to +3.7%.  While most economists are revising their estimates of Q3 down, no one is calling for a contraction – hence, our opinion is that there will be no double dip.

Earnings season continues to chug along with good news.  With a little less than 70% of the S&P 500 companies having already reported, 64% have beaten their top-line (revenue) projections and 79% have beaten their bottom-line (profit/earnings).  We have written many times that it is important to see the top-line growing since cost cutting cannot go on forever.  Good profit margins also act like a coiled spring when revenue picks up since a repaired and solid corporate cost structure allows profit to flow freely to the bottom-line.  Additionally, we know that solid corporate profits lead to better employment and more capital expenditures; therefore, since non-financial US companies are reporting $837b in cash on their books, we think things will probably be improving for the next 12-18 months.

On a final interesting note (and in attempt to be just a little bit funny) there is a report out that says a major investment bank has prohibited their employees from using profanity in their future email.  In a world where we hear several traditionally profane words every hour on modern TV, we chuckle at the prospect of future research reports attached to emails that use the word “doo-doo” instead of the more vulgar, albeit more popular 4 letter “S” word

So our bottom line this week is this – if we were to simplify the financial world into going in one of two directions (forward or reverse), we feel that we are definitely in ‘forward.’  The thing to remember about moving forward is that the speed will always fluctuate.  We will speed up and slow down, but we are still moving forward.  We see no risk of a double-dip, and while we may have slowed down, that’s not such a crazy thing to happen after we come out of the trough we were in during the Q1 & Q2 of 2009.  Having a good plan and sticking to it rather than trying to haphazardly time or trade around a market will be a major key in investors limiting, if not completely removing, the angst around the current situation and its impact on their personal situation.

Please call us with questions or if we can help.

Securities and Financial Planning offered through LPL Financial, a Registered Investment Advisor.  Member FINRA/SIPC

**Standard Compliance Disclosures
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.  All performance referenced is historical and is no guarantee of future results.  All indices are unmanaged and cannot be invested into directly.  Stock investing involves risk including loss of principal.  The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries, and widely held by individuals and institutional investors. The Standard & Poor’s 500 Stock Index (S&P 500) is an unmanaged capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The NASDAQ Composite Index measures all domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index. The Russell 2000 Small Stock Index is an unmanaged index generall representative of the 2000 smallest companies in the Russell 3000 Index.  The Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values.