The equity market indices were mixed again last week with the Dow Jones Industrial Average losing 0.62% to finish at 10,151, the S&P 500 Index lost 0.66% to finish at 1,065 and the Nasdaq Composite Index lost 1.20% to finish at 2,154. The Russell 2000, which measures smaller capitalization stocks, gained 0.98% to finish at 616.76.
The stock market clearly has a muted view on the economy. While there was some merger and acquisition activity early in the week and better news on initial jobless claims, the market still found reasons to sell. Poor housing data and other drab economic releases (durable goods, weak housing starts, existing home sales plunging and Ireland’s debt downgrade) continue to remind us of the current slowdown. There was some good news that did not receive a lot of attention – mortgage delinquencies and foreclosures fell in July alongside commercial real estate delinquencies. Additionally, credit card delinquencies are declining as well. In fact, credit card debt has hit the lowest level in 8 years.
The recent jobless claims reports are worth mentioning. Initial jobless claims are exactly what they sound like – people applying for new government unemployment benefits, ostensibly because they have lost their jobs. In July, these initial jobless claims were at their lows for the year. Lately, we have been seeing the initial jobless claims increasing. Reason – we think it is because unemployment benefits were restored to 2.5 million people on July 22nd.
We think that this restoration of unemployment benefits triggered already unemployed Americans whose benefits ran out to file brand new claims. So it’s possible that this is causing the number of initial claims to rise rather than a new rising trend in actual layoffs. According to our LPL Financial research department, job cuts at U.S. corporations have actually been falling, signifying layoffs are probably moving down and not up. We think it may take quite a few weeks to see this all worked out and any anomalies brought to light.
The GDP report was the other news item from late last week. Revised second quarter GDP was reported at 1.6% and down from the initially reported number of 2.4%. While not a great number, it is certainly better than the expected revision number of 1.3%. Ben Bernanke’s comments that the Fed will consider an unconventional measure to boost the economy if it continues to deteriorate helped the market rally on Friday.
As we have been writing for a while, it is clear to us that the economy is slowing – no doubt about that. The popular press terms this, “a slow patch”. It’s not abnormal during recoveries for unemployment claims and the stock market to weaken, that’s where the term “Soft Patch” comes from. A soft patch is common after a recession and a rapid recovery like we have experienced. A soft patch is a lot different than a, “double-dip recession” which would happen if GDP went negative again. In fact, double dip recessions are rare, although today’s backdrop is quite unusual so it’s can’t be summarily ruled out. We are keeping an eye on several different indicators here at Monument Wealth Management to alert us to whether or not this slowdown becomes a double-dip recession.
See our comments last week for our thoughts last week on GDP and the double dip recession. As far as jobs, corporate spending and the economy, it seems that companies are really in a wait and see mode. They have the profits and cash to hire but seem stuck. We think that will eventually change, especially after the November elections. Additionally, we are seeing a lot of talk about the possibility of the Bush tax cuts being extended into 2011, which would help break the malaise as well.
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**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.