Don’s Outlook 6/25/2010
Although I was not surprised that the Federal Open Market Committee (FOMC) left interest rates unchanged on Wednesday, I believe their accompanying statement was more downbeat than investors expected. Not only did it tone down its remarks regarding economic recovery—choosing to call it “proceeding” rather than “strengthening”—other parts of the statement alluded to greater uncertainty regarding housing and employment. Overall, with the expiration of emergency monetary measures already underway, the limits of policy stimulus may have been reached, and the true strength of the recovery will now be tested.
In fact, on Tuesday, data showed that existing home sales dipped 2.2% in May, meaning that the benefits of the credit extension were waning faster than expected, or had less of an impact. Nevertheless, home sales have climbed 25% since their lowest point in January 2009. Meanwhile, the Federal Reserve’s view on employment may have been affected by the token headline gain of 431,000 new jobs in May, which was dominated by census hiring, while private payroll hiring was a paltry 41,000. The hope is that the census had a temporary crowding-out effect, similar to previous cycles, as private employers competed to retain or add skilled workers to their ranks.
The Fed’s choice of language, however, reflects the lull in activity that the stock market has already priced in since late April. Stocks have performed better over the past three weeks and have managed to repair some of the damage inflicted by the May correction. Yet, just as it took the S&P 500 Index three attempts to poke above its 200-day moving average, the 50-day moving average may prove significant resistance as well. On Monday the S&P 500 attempted to push above this level on an intraday basis, but the index turned down and closed lower on the day, creating a bearish reversal that may take time to repair. Other indices, such as the Nasdaq, ended six consecutive up days and a seven percent gain with its own reversal, which set the tone for the remainder of the week.
Although the earnings season officially gets underway in less than three weeks, when Alcoa announces its results, some companies will soon begin the process of pre-announcing their earnings for the second quarter. These results will be paramount for analysts and may, in the end, have the most impact on market levels in coming weeks. The expectation is that corporate profits will remain solid in the second quarter, but that positive surprises may be harder to come by now that the effects of cost cutting and productivity improvements have run their course. The forecasts for 2011 may garner the most attention as investors assess what the next market catalyst will be.
