The Nitty Gritty Details:
Bargain hunters are stepping in this morning and supporting stocks at the open. Last night’s profit warning from a major technology chipmaker is weighing on that sector a bit this morning. Overseas markets are mixed, with Europe up marginally in mid-day trading, while Japan closed higher and the Hang Seng dipped. Greece’s seemingly permanent appearance in the headlines is limiting gains in Europe and weighing on the euro. Most key commodities are higher, though Chinese tightening fears are pressuring copper. U.S. crude is up over $101 on follow-through after OPEC’s paralysis.
Looking back at Wednesday, there wasn’t much in the way of news, but what news there was failed to help stocks stop their five-day slide amid more growth concerns. The World Bank cut its global growth forecast, while the Beige Book confirmed the mixed economic conditions. There was some interesting news in the oil patch as OPEC failed to reach an agreement to increase supply, while weekly inventories were tighter than expected, pushing oil prices and the Energy sector higher. The rest of the cyclical sectors drove the broad averages lower, while the defensives held up well – a trend that has been in place for several months now. Financials sold off after a bill to postpone the implementation of debit card fee caps failed, while telecom equipment earnings weakness weighed on Technology. Most commodities besides oil were lower as the dollar rebounded.
Around our financial planning firm this morning, we were discussing four items that we thought would be of particular interest to our readers:
The Markets Broken Down:
- What are some potential catalysts to move the market higher? Looking out over the next few months, a quicker return to normal in Japan, economic data that begins to beat expectations again, a solid earnings reporting and guidance season, and a successful resolution to the debt ceiling debate accompanied by spending cuts are all potential catalysts.
- Did the money from QE2 make it into the economy yet or does it remain on bank balance sheets? Although bank lending is increasing at the fastest rate in several years, most of the money that the Fed injected into the system via QE1 and QE2 remains on bank balance sheets, as banks, for various reasons (regulatory uncertainty, lack of demand, lack of qualified borrowers), have held back on lending.
- Is weakness in consumer demand likely to reduce inflation? The large amount of spare capacity (of both labor and capital) in the economy has led to restrained wage growth. Wages account for about 70% of business costs, so without more robust wage inflation, it is difficult to pass along input costs to consumers.
- The big improvement in the trade deficit in April is transitory and is related to the Japanese earthquake. The nation’s trade deficit (exports minus imports) narrowed dramatically (and unexpectedly) in April, but the narrowing was largely the result of economists’ and market participants’ underestimation of the impact of the Japanese earthquake and its aftermath on global trade. The U.S. trade deficit narrowed to $43.7 billion in April from the $46.8 billion deficit in March. The $3 billion improvement was the result of a $2 billion increase in exports and a $1 billion drop in imports between March and April. Disruptions in Japan played a big role here. Our imports from Japan posted their largest month-over-month drop ever between March and April, and our exports to Japan plunged as well. The pace of Japan’s recovery from the quake has quickened in the past few weeks, but how fast Japan recovers will be crucial to global trade in the coming months.
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
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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