February 2, 2010
Markets Unable to shake the doldrum
Equity markets struggled to find firm ground this past week and by Friday the S&P 500 index lost an additional 1.6% to close the month of January down 3.7%.
Pinpointing the exact cause of the current weakness is difficult, but in contrast to last year when investors were keen to “buy the news” without regard, sentiment reversed course and the markets are now afflicted with a case of “sell any news” in the first month of 2010.
Reflecting on each pullback since the equity markets bottomed in March ‘09, we find that the current 6.7% correction is now the second largest behind the 9.1% decline that occurred in June and July of last year.
Source: VIX and More Blog
Even improved earnings reports did little to rouse buyers from their hibernation. The number of companies beating earnings estimates continued to rise last week and now stands at 73% for the fourth quarter, according to research from Bespoke investment Group.
Nor could the Federal Reserve offer solace to markets after the FOMC meeting on Wednesday and the divisive reconfirmation of Ben Bernanke as Chairman of the Federal Reserve. Language in the FOMC statement shifted to a slightly more optimistic tone from the December statement. Previously, the Fed stated that economic activity would be likely to remain weak for a time, but now the Fed sees the economic recovery as being “moderate.”
On positive during the week was an announcement from the International Monetary Fund increasing projections for global GDP growth this year. According to their estimates, global GDP will grow by 4% this year, in contrast to prior estimates of 3.25% growth. As with most prognosticators, the IMF is expecting the greatest recovery in the emerging economies but the fund warned that upside and downside growth risks exist for the world economies.
Source: IMF
The favored whipping post of the past week was undoubtedly the United Kingdom. On Wednesday, the Office of National Statistics revealed that Gross Domestic Product (GDP) rose 0.1% in the fourth quarter of 2009 (only representative of 40% of the underlying components), the first expansion after 6 consecutive quarters of contraction.
On the following day, investors caught wind of a Reuter’s story reporting that Standard & Poor’s is no longer classifying UK banks as the most stable in the world. Ironically, the report was originally published in mid-December, a fact that was apparently glossed over by investors.
PIMCO’s own Bill Gross piled on to the UK bandwagon in his most recent commentary, calling UK government bonds a “must avoid.” The weak growth levels and overarching pessimism about the British economy are reopening discussions about a possible extension of that country’s quantitative easing program. Gilts were rallying on the potential for another £25 billion bond purchase program.
Source: The Economist
Coming back across the pond to the US, we discovered a starkly different story. GDP surged by 5.7% in the quarter, well ahead of analysts’ estimates.
The biggest contributor to growth for the quarter was easily the change in private inventories, which accounted for 3.4% of the growth figure. That represented the largest contribution to GDP from inventories since 1984.
Another large contributor was exports, which added 1.9% to output. Inventory and export growth alone is not enough to propel a self sustaining recovery, but gains in consumer spending and business investment represent encouraging signs that the economy will have legs through the first several quarters of 2010.
Source: Bespoke Investment Group
A host of important earnings reports are on tap for the week. Included within that list are ExxonMobil, Visa, Pfizer, Sony, BP and UPS.
President Obama will unveil his fiscal 2011 budget plans early in the week. Media outlets are already reporting that the president will project a deficit of $1.6 trillion this year, eventually shrinking to $706 billion by 2014.
Investors will key in on one economic indicator this week – the employment report on Friday. After prematurely expecting job growth in December, only to be disappointed, economists are once again calling for a 13k job pickup in nonfarm payrolls.
Bloomberg is reporting that the stars may be in alignment for economists this time around, as a recent uptick in the number of individuals reporting jobs as “plentiful” in the monthly consumer confidence survey from the Conference Board. In prior recessions, when the plentiful indicator began to rise, job growth returned within two months.
Source: Bloomberg
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