Week of June 11th – 15th, 2012
Hope Is Alive…
Once again much of the market gains, like last week, were built on hope. In May, it was all about fear. In June, it’s all about hope. U.S. equity markets fell over 1.0% on Monday as Spain’s debt deal, announced over the weekend, did little to inspire much confidence in the financial markets. Stocks rose Tuesday, fell Wednesday, and then moved higher on Thursday and Friday. Central banks around the world said they would work together to keep liquidity flowing in financial markets after the election in Greece on Sunday. In addition, weak economic reports in the U.S. raised hope that the Federal Reserve will make another move to stimulate the slowing economy. Right now, bad news is good news. For the week, the Dow Jones Industrial Average rose 1.7%, the S&P 500 gained 1.3%, and the Nasdaq barely closed in the green as it rose just 0.5%.
Oil prices remained steady, closing almost unchanged for the week. A barrel of crude sold for $84.03 on Friday, down just 0.3%. Gold prices rebounded from the prior week’s drop as worries over the situation in Europe led traders to the safe haven. An ounce of gold closed trading at $1,624.95 to end the week with a gain of 1.9%. Investors also bought bonds, helping push yields back down again. The 10-year Treasury closed the week with a yield of 1.58%, off 3.7% over the past five days.
Economic reports released this week showed more weakness in growth, prompting speculation of more Fed easing. The Import Price Index fell by the largest amount in two years in May, falling 1.0% month-over-month. The drop met expectations. Year-over-year, import prices are off 0.3%. The U.S. government reported a budget deficit of $125 billion in May, more than twice the level posted in the same month last year. So for this fiscal year, the budget deficit stands at $844.5 billion, slightly less than last year but still on track for the fourth consecutive year with a trillion dollar shortfall. Advance retail sales fell 0.2% month-over-month in May, matching the consensus estimate. The Producer Price Index fell 1.0% month-over-month in May, slightly below the 0.6% drop expected. The core rate, which excludes food and energy, rose 0.2% month-over-month, matching expectations. The MBA Mortgage Application Index jumped 18.0% last week. The Refinance Index soared 19.2% while the Purchase Index gained 12.8%. Initial jobless claims rose last week to 386,000 from an upwardly revised figure of 380,000 from the prior week. Expectations were for 375,000 claims. The four-week moving average rose by 3,500 to 382,000, while continuing claims fell 33,000 to 3,278,000. The Consumer Price Index slipped by 0.3% month-over-month in May, matching expectations. Year-over-year, the index is higher by 1.7% while the core rate is up 2.3%. Industrial production fell 0.1% month-over-month in May, versus a gain of 0.1% expected. The preliminary University of Michigan Consumer Sentiment Index showed a steep drop, falling to 74.1 in June from 79.3 in May. Economists were expecting a reading of 77.5.
As expected, over the weekend Spain announced that it would seek aid in order to save its banking system, which has been hit hard by bad loans from real estate. The European Union agreed to grant loans of up to 100 billion euros ($125 billion) for banks that need capital. While this was seen as somewhat positive, many believe the increase to Spain’s debt level will not help pull this country out of a recession. On Tuesday, Fitch Ratings downgraded 18 Spanish banks. China released some lukewarm economic reports over the weekend. Consumer inflation is slowing more than expected while exports jumped by a hefty 15.3% year-over-year.
The election in Greece this weekend will be watched closely as the outcome could determine whether the country stays in the Euro or not. Polls are very close, so it’s too hard to handicap. It’s also not a sure bet that the anti-austerity party will seek to leave the Euro if they win. Equity markets could be volatile next week, with fairly strong moves in either direction. We also have the Federal Reserve Open Market Committee meeting next week. Some investors are hoping the Fed will announce some type of new quantitative easing due to the recent soft economic numbers. Markets could move in either direction depending on the Fed’s comments, so investors should be ready for an interesting week ahead. If hope turns to disappointment, we could see markets give back gains seen over the past few weeks. However, if the Fed does come out with a new stimulus plan and Greek elections somehow conclude with little fanfare, the market could resume its uptrend.
Disclosures & Disclaimers
Securities offered through Registered Representatives of Centara Capital Securities, Inc., Member FINRA/SIPC, and Centara Insurance Services. CA Insurance Lic. #0F30702. Investment advisory and financial planning services offered through Centara Capital Management Group, Inc., a Registered Investment Advisor. CA Insurance Lic. #0D85861. Legal services provided by Centara Legal Group, APC, David J. Gebhardt, Principal. None of the information presented is to be construed as investment advice. See a prospectus before investing.
This commentary is provided for educational purposes only. The information, analysis and opinions expressed herein reflect our judgment as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.All investments carry a certain risk and there is no assurance that an investment will provide positive performance over any period of time. Information obtained from third party resources are believed to be reliable but not guaranteed. Past performance is not indicative of future results.