Boosts, Lifts, and Gains

8/15/11: In the markets, as in life, there are no guarantees but everyone is entitled to their opinion. Here’s my opinion on the financial markets today.

The Nitty Gritty Details:

Japan’s economy contracted about half as much as expected during the second quarter, giving U.S. futures a boost overnight and setting up a possible third straight positive session for the S&P 500.  Stocks also got a lift from several merger announcements, including one in the Technology sector valued at over $12 billion.  Gains have held so far this morning despite a New York Empire State manufacturing survey that showed manufacturing in the region contracted for the third straight month.  Overseas markets were higher as market participants look toward tomorrow’s Sarkozy-Merkel rendezvous and react to the improved Japanese growth outlook.  Commodities are broadly higher amid a much weaker dollar.  Crude is up almost a dollar to over $86, while gold is holding steady despite the increased risk appetite and shift away from Treasuries into equities.

Looking back at Friday, amid heightened concerns that the U.S. economy was teetering on the edge of recession, an increase in retail sales sparked a bit of a relief rally.  Gains in Europe on hopes of more action from eurozone leaders and evidence of less use of emergency funding among European banks also helped support stocks worldwide.  Remarkably, Friday’s gains, which came despite an awful consumer confidence number, marked the first back-to-back advance for the market in three weeks.  Industrials topped the sector rankings, while Financials fell most.  Friday’s gains fell short of what was needed to get back to break even for the week as the S&P 500 lost 1.6% over the past five trading days.

Around our financial planning services firm this morning, we were discussing four items that we thought would be of particular interest to our readers:

The Markets Broken Down:

1. Japan’s GDP contracts less than expected. Japan’s second quarter GDP contracted about half as much as expected, by 0.3% (1.3% annualized).  Increased government spending on disaster-relief efforts helped offset lower exports, growing imports and failing consumer spending in the wake of the natural disaster.  Recent data suggests that the worst may be over for Japan and that recovery is well under way.

2. Investors are looking to earnings this week to “anchor” the markets. After last week’s wild swings, investors hope earnings results from a major retailer and two prominent technology companies (among others) will provide some stability this week.  For the first three days of last week, there were no big earnings releases, and when investors don’t have anything to “tie to,” they go to the worst ideas.  In addition to earnings, other key events are Nicolas Sarkozy’s meeting with Angela Merkel tomorrow and the release of U.S. manufacturing, housing and jobless data.

3. What are our expectations for manufacturing looking ahead to the next few quarters? In short, we expect manufacturing activity to expand in the second half of the year.  The Institute for Supply Management (ISM) Manufacturing Index, an indicator of business spending, has historically bottomed around 50 in non-recessionary periods and currently stands at 50.9.  High cash balances, healthy profits, strong export growth (largely to emerging market countries) and a very weak dollar should continue to drive modest, low-to-mid single-digit growth in business spending and manufacturing activity over the next several quarters, consistent with our 2-2.5% U.S. GDP growth forecast.  The resumption of full-scale auto production as Japan rebuilds is positive.

4. Long-term Treasury yields closed lower on Friday in a week marked by extreme volatility.  The 2-year note yield fell to its record low following the release of the FOMC statement, which pledged to keep rates low until mid-2013.  Ten-year note yields closed within a few basis points of their all-time low on Wednesday, benefiting from building expectations of further quantitative easing.  The upcoming Jackson Hole symposium, the forum Bernanke used to hint at quantitative easing a year ago, may leave some investors disappointed as the hurdle for additional Treasury purchases is high, in our view.  The change of language on last week’s FOMC statement was met with three dissenters and inflation is much higher now than it was a year ago.

As always, email me here with your questions or comments.  I love to hear from you and thoroughly enjoy the “intellectual debate” with our clients and friends that these opinions generate.


Greg Powell, CIMA
Wealth Consultant

Note: The opinions voiced in this material are for general information and are not intended to be specific advice. Any indices such as the S & P 500 can’t be invested into directly. Past performance is no assurance of a future result.

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