Don’s Outlook 7/22/2011
The stock market rebounded this week as news of better corporate earnings took center stage once again. The S&P 500 bounced off its 50-day moving average and moved back toward its July highs, but it took eight days of seesaw action to recapture last week’s lost ground. In addition to earnings, there was positive news from both manufacturing and housing indicators to push bullish sentiment higher, yet it still remains below April levels after a similar stock market rally.
The rebound from June lows has occurred even though sovereign debt issues remain largely unresolved, particularly among the U.S. and European nations. The ceremonial dance on Capitol Hill has meant that legislators have made little headway in the ongoing debate over whether or not to extend the federal debt ceiling, even if a compromise is widely expected. The delayed agreement, however, which is meant to exact the most amount of leverage on the opposing side, has only hurt the U.S. dollar and kept it from rebounding.
Meanwhile, the behavior and relative strength of the euro over the past few months, even in light of heightened chaos amid troubled European nations such as Greece, Italy, and Portugal shows that there still remains strong underlying demand for euros and the bonds of more stable nations such as Germany and France. This week EU leaders held an emergency summit, releasing a draft statement that announced an orderly default for Greece was possible, as well as an expansion of the rescue fund that could be tapped to recapitalize banks and stave off contagion if necessary.
The debt-ceiling impasse here in the U.S. has also hampered consumer confidence, although you would not know it by watching the retail numbers. Last Friday’s release of the University of Michigan’s sentiment brought confidence readings down to the lowest level since March 2009. Moreover, the publicity over the budget battles brought public discontent to new heights for the Obama administration, with more than 50 percent of respondents rating government economic policies as “poor.” Only five other surveys in the past 50 years have resulted in a majority voicing a negative opinion as high as this. However, just as similar policy debates surrounding the Congressional elections resulted in a decline in confidence, a rebound is expected once a deal is struck, even if it is short on specifics.
The contrasting rise in retail numbers this week is a classic case of, “watch what I do, not what I say.” The ICSC store sales index rose for the fourth consecutive time since mid June and is now up more than 3.1 percent month over month, and the annual pace continues to accelerate. This combined with a positive reading from the Philadelphia Fed’s manufacturing survey and a stronger index of leading economic indicators (LEI) to provide hope that the summer soft patch will be cut short. With earnings season now in full swing, we will soon know whether or not companies can continue to beat estimates and provide upward guidance for the rest of 2011.
