The Nitty Gritty Details:
After an early rally based in the Washington debt ceiling deal, stocks took a dive after July’s ISM manufacturing index came in at 50.9, its lowest level since July 2009 and well below the 55.3 mark in June. A number below 50 would mean contraction for the manufacturing sector. The July ISM number is the first major piece of data for the third quarter, and it is particularly disappointing coming on the heels of Friday’s second quarter GDP report. Traders were particularly concerned that the new orders component of the number fell below 50 to 49.2. Treasuries rose in response to the weak manufacturing report, with the benchmark 10-year note up 15/32 to yield 2.74%. Crude is up over $2 to $98, while gold is off $12 to $1619.
Looking back at Friday, the battle in Washington led to the worst week for stocks in a year. The S&P 500 lost 4% last week, cutting this year’s gains in half. Losses were of course primarily attributable to the debt ceiling deadline inching closer with little progress toward a deal (as we know, that changed this weekend). Shrinking odds of a “grand bargain” increased the probability of a U.S. debt downgrade, while U.S. GDP came in soft, further adding to the market’s angst. Flows out of stocks ended up in gold, which rose 1.6% to another new high near $1630. All 10 S&P sectors fell, though Financials ended near unchanged on resilient performances from Insurance and REITS. Recourse sectors were the biggest losers on some earnings-related weakness and falling commodity prices.
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. Stocks would likely be higher if it were not for the concern over the impasse in Washington. The backdrop for the stock market outside of Washington has been improving with further evidence coming to light last week: (1) strong earnings despite weak second quarter GDP were reported, (2) retail sales were up about 5% for the third week in a row, and (3) initial filings of claims for unemployment benefits fell below the 400,000 level and have been improving steadily in recent weeks. The flip side of the stock market rally is that safe havens such as precious metals and even government bonds may surrender some of their gains achieved in the last week or so as gold soared to new highs. However, it is unlikely to be clear sailing for the rest of the year, as volatility is here to stay.
2. Washington will be a major focus for markets for the rest of this year. The budget agreement that averted a government shutdown earlier this year, and presaged the current battle in Washington, only funded the government for the 2011 fiscal year which ends September 30th. While the current deal making in Washington may alleviate the problem of having “run out of debt capacity,” the government will soon “run out of money” if another deal is not reached by the end of next month to avoid a shutdown. This means another market volatility inducing battle is on tap for early this fall. Further, another vote on the second $1.5 trillion round of spending cuts and possible boosting of the debt ceiling is set for December 23rd.
3. This is another big earnings week. This week, another 107 S&P 500 companies will report, virtually “locking in” what will prove to be a very solid earnings season relative to expectations. Companies have overwhelmingly beaten expectations on the top and bottom line, while guidance has led analysts to only marginally reduce second half profit expectations.
4. Is the debt ceiling deal enough to avoid a downgrade? In our opinion, the debt ceiling deal does not go far enough to put the United States on a path to financial sustainability nor does it decisively remove the threat of a downgrade to the nation’s AAA credit rating. The spending cuts to narrow the deficit will be phased in slowly with little effect until 2013, resulting in minimal impact on the economy in the near term.
Do you agree or disagree? Email me here with your comments or questions. I love “intellectual debate” with our clients and friends that 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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