Aug 20, 201201:09 PMBlog: Alaska's Eye on Wall Street
Week in Review: Aug. 17
A year ago we were in crisis over the US debt ceiling. The result was a downgrade of the US credit rating to AA by S&P. Europe was also in crisis. But, global easing, low rates, low inflation, decent earnings, and better US housing data help explain why the S&P 500 is +18.79% higher today than 12 months ago. Low valuations in July 2012 are also part of the story.
Bond yields have backed up from their July all-time lows of 1.39%. The 10 year Treasury is now 1.81%, up +15bp for the week. The safe haven bid has come out of the market. Are rising yields telling us that the economy is perking up? Maybe, but the data is subpar so far.
Stocks were up for the week - the S&P 500 was up +0.83% to 1418, it's highest level in four months. European stocks also rose for the 11th week in a row. It is very quiet in the markets and trading volume is way down.
FT: Shares in Facebook dropped to under $20 and have been under relentless pressure since listing at $38 and peaking at $45. The company's first earnings report has done little to assure investors about its growth prospects. The company's market capitalization, more than $100bn at its listing, slumped to $43bn on Thursday.
Wal-Mart said U.S. sales increased +2.2% in the second quarter at locations open at least a year. However, the company said its ability to expand is limited by economically stressed shoppers, who are surviving paycheck to paycheck. "I don't think the economy's helping us," CFO Charles Holley Jr. said. "If anything, our consumer probably is a little more stretched because of gas prices."
Famed market historian and writer Burton Malkiel notes in the WSJ this week that "even amid the current market turmoil, stocks still beat bonds". He also said that "holding low cost index funds and (indexed) ETFs does not achieve mediocre returns but well above average returns. During 2011, index fund investors outperformed over 80% of actively managed equity funds. The same results have occurred in the first half of 2012". This is music to our ears. Clients know we favor low cost index funds in all of our balanced accounts.
FT on the globalization of US business: "IT companies in the S&P 500 draw 54% of their revenues from outside America, up from 42% a decade ago. In the materials, consumer goods and manufacturing sectors, those ratios have also risen by about +10% in this period to 45%, 35% and 34%. And for some companies, the proportion is far higher: just look at Texas Instruments (89%), Bristol Myers (82%) and Intel (79%).
The CFA Institute observes: The Eurozone economy contracted -0.2% between the first and second quarters, bringing it closer to a double-dip recession. Meanwhile, Germany's gross domestic product grew +0.3%, according to Eurostat. France's economy stagnated, while Greece declined -6.2%, Portugal -1.2%, Italy -0.7% and Spain -0.4%.
Data out last week: Generally better numbers for growth. While the PPI jumped +0.3% in July it's up only +0.5% year-over-year, the lowest increase since October 2009. The CPI monthly inflation index was flat and is up +1.4% over the past 12 months. Drought related rising food prices will have only a moderate impact on overall inflation according to economists.
ISI opines: We put the odds at 20% of a recession in the next year. The economic data over the last four weeks has generally been good as 76% of the releases have been better than expected.
Data this week: Existing and new home sales should show slight increases and durable goods out Thursday are expected to be up +2.5%. FOMC minutes on Wednesday.