A Mixed Bag of News and Higher Stock Prices
A Mixed Bag of News and Higher Stock Prices April 27, 2011
The news last week on the economic front was one of a mixture of both good and bad. Of course the bad news is the growing sovereign debt crisis, including the "mother ship" U.S. and its ballooning debt. Standard & Poor's faced reality and came out with an issuance of a negative outlook on the U.S. credit rating. We still view the potential risk of another credit crisis as very possible in the future, even though we remain committed to equities. Fixed income is the area to which we are less committed and it should get interesting as the summer months unfold. As we have mentioned before, QE2 is scheduled to end on June 30th. What this means is that the Fed would no longer be a substantial buyer of Treasuries, and the question looms as to what the net effect will be on interest rates if they are no longer instituting an exhorted effort to keep them low. The thinking is interest rate volatility could possibly increase as the forces of supply and demand realign without the presence of the Fed purchasing Treasuries.
Other economic reports released last week include jobless claims that were higher than expected. And this week will include the release of new home sales, GDP, personal income, and consumer sentiment. If these reports are positive, we could see a further push upward in the equity markets - we'll take it. However, Ben Bernanke is going to attempt to hold a press meeting for the first time following the release of the Fed's minutes. We expect this may have an impact that is likely to keep the market in check for the first couple of days. But after Wednesday, it will likely be a different story. It should be another volatile week but our expectations are that the market will finish higher on Friday. The markets remain precarious and potentially volatile. We will report to you a more complete observation in the near future.
A Review of Last Week's Markets
Looking back on a shortened but volatile trading week, most of the volatility was being driven by earnings. This helped to reverse the markets into a positive mode by the end of the week. The market started on the wrong foot in reaction to Standard & Poor's lowered outlook on U.S. government debt, going from neutral to negative. While you would think that this announcement should not have come as a shock to market participants, it looked more like an excuse to sell as the market had been in a multiple week trading range. The markets were nervous, but many realized that this report really wasn't out of line and that the U.S. wasn't going to default today. So many market participants are willing to watch Congress and the Obama Administration hammer out some sort of strategy. Then it was back to business as first quarter earnings results took center stage beginning on Tuesday. With seemingly every company exceeding expectations, the major averages managed to build off Monday afternoon's reversal and continue higher. Among the sectors, eight of the 10 gained this week, led by technology +3.0%, basic materials +2.8% and energy +2.4%. Telecom -0.7% and financials -0.2% were the only decliners. The economic calendar was light, primarily focusing on housing data. Those results came in positive as Housing Starts, Building Permits and, more importantly, Existing Home Sales all exceeded their consensus estimates. The negative was that Initial jobless claims remained above 400,000 for a second straight week, but no one seems to be focusing on this at this time.
