“Off The Wall” Blog
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So Much for the Dog Days of August!
By David B. Armstrong, CFA | Aug 13, 2012 | Weekly Market Commentary
The news has been depressing lately. There’s renewed talk of recession, a stressed labor market, a restrained (spending) consumer and the ongoing euro-zone worries.
But you wouldn’t know it by looking at the major averages, which are all showing respectable gains for the year.
In fact – let’s take a look at a chart of the Standard & Poor’s 500 Index since the end of last September.
Now ask yourself how many times you heard that the sky was falling over that time. Yeah, sure there are plenty of scary sell-offs in there.
This rally has been dull. Additionally, the volume has been very light, especially last week. Pick up any weekly financial publication and you can’t miss the references to the light volume.
If you are an investor with a good plan and a good investment strategy going about your everyday life enjoying yourself and your summer, do you really care that we got within multiyear highs on light volume?
So how did we get here?
First, the Q2 earnings season. Top line revenue results were horrible with over half missing their forecasts – the worst since the 2008 crisis. Also, profits weren’t up much from one year ago, and will most likely come in at only 2.8% higher. BUT, profits did manage to beat the lowered expectations, and investors let out a collective sigh of relief.
Second, and more importantly, the expectation of central bank intervention is really helping.
Third, the housing sector is rocking and as long as it holds up, there is little chance of recession. Housing is important for employment, but more important are the prices of houses. If someone sells their home for a higher price, everyone in town feels good. They feel RICHER. And that helps confidence. The National Association of Realtors reported that prices are increasing in 75% of towns across the U.S.
Forth, there have been some positive economic reports out lately – July payroll data from two weeks ago was pretty good and there was another decline in weekly unemployment claims last week as well.
Finally, the deepening crisis in Europe may be forcing the tough-talking yet ever-reluctant and conservative European Central Bank (ECB) into action.
So even though we are experiencing a global growth slowdown, there are some pieces of good news that are contributing to a nice rally.
Looking to next week, the economic calendar includes the release of retail sales. After three consecutive monthly declines (April, May & June), better-than-expected same-store sales from the major retailers have analysts betting the losing streak will come to an end when the report comes out for July. It would be a welcome report to see July with a positive outcome.
Our position remains that the U.S will not see a double-dip recession so long as housing does not experience another downturn, and our domestic economy will continue to grow in the most modest of ways. 2012 will probably end up looking a lot like 2010 and 2011 where slightly weakening or sideways markets will give way to improvement over the fall. Given that a little weakening or sideways action would take place from a +11% YTD number on the Standard & Poor’s 500 (S&P 500) suggest to us that the overall YTD return should be much better than people may think.
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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 generally representative of the 2000 smallest companies in the Russell 3000 Index. The Russell 2000 is an unmanaged index generally comprised of companies with lower price-to-book ratios and lower forecasted growth values. The 2, 10 and 30 year Treasury is simply the yield at the close of the day.
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