Weekly Wrap
The fundamentals were almost entirely bearish this week. It is no surprise that all the major indices were lower. In fact, it is a bit surprising that the sell-off was not more severe.
Oil prices were up sharply, the Fed Chairman as much as said that rate cuts are unlikely any time soon, the economic data were mixed at best, and a key inflation measure was higher than expected. There wasn't any significant corporate news to offset the bearish macro-economic issues.
The Fed Chairman's testimony before the Joint Economic Committee of Congress on Wednesday ranked as the most important event of the week. Fed Chairman Bernanke said that inflation remains the predominant concern. He made that absolutely clear.
He did not express significant concern about economic growth, and while recognizing the risk from the housing sector, he also suggested that the impact from the problems in the subprime mortgage market would be contained.
Bernanke's testimony implied that it will take a while for the current level of interest rates to bring inflation down. That means market hopes for a rate cut by the end of the summer are overly optimistic. The S&P lost 11 points on the day of his testimony.
The economic data this week brought mixed news. New home sales for February were down 3.9% despite expectations of a bounce from a sharp drop in January. Consumer confidence in March posted the first drop in five months. February durable goods new orders were up a smaller than expected 2.5% after a 9.3% plunge in January. The housing and manufacturing sectors remain drags on the economy.
More positively, initial claims for unemployment remained at low levels, reflecting a strong labor market. Fourth quarter real GDP growth was revised modestly higher to a 2.5% annual rate from 2.2%. The March Chicago PMI index jumped sharply higher to a strong 61.7 from 47.9 in February, raising hopes of a manufacturing rebound. And February personal consumption expenditures rose a stronger than expected 0.6%, showing that consumer spending remains strong.
The most important economic release, however, was the clearly bearish 0.3% increase in the February core personal consumption expenditure (PCE) price deflator.
This is the Fed's favorite inflation measure. The gain was larger than an expected 0.2%, and follows a 0.1% increase in December and a 0.2% gain in January. It raised the year-over-year increase to 2.4% from 2.2% in January. The Fed's forecast calls for this to get below 2.0% in 2008. It is going in the wrong direction.
This is just one month of data and it shouldn't be over-emphasized. If the core PCE continues at even a 0.2% rate in upcoming months, however, it will keep the Fed in an aggressive inflation fighting mood. Higher inflation is always bad for the financial markets.
Adding to inflation concerns is the fact that oil prices rose to about $66 a barrel this week from $62 last week and $57 the week before. The Iran situation was a factor, but there are concerns that oil prices will remain higher regardless of how that plays out.
The macro economic news therefore amounts to rising inflationary pressures, a tough stance from the Fed, and continued sluggish economic indicators. There isn't a lot of good news. The market could have sold off more following the solid gains last week.
The biggest corporate news this week was that Dell is delaying its 10-K report due to an ongoing investigation into its accounting, but that news didn't hit the stock market very hard since it is a company-specific issue.
The first quarter ended with the S&P nearly flat for the year. It was an up and down quarter with excessive optimism followed by excessive fears. The market has filtered through it all and has assessed that stable interest rates and significantly slower earnings growth warrant little net change.
The market is likely to remain extremely sensitive to economic releases, but an increased focus to corporate news will develop as first quarter earnings reports in mid-April approach.
| Index | Started Week | Ended Week | Change | % Change | YTD |
| DJIA | 12481.01 | 12354.35 | -126.66 | -1.0 % | -0.9 % |
| Nasdaq | 2456.18 | 2421.64 | -34.54 | -1.4 % | 0.3 % |
| S&P 500 | 1436.11 | 1420.86 | -15.25 | -1.1 % | 0.2 % |
| Russell 2000 | 808.05 | 800.71 | -7.34 | -0.9 % | 1.7 % |
Choppy weak. Not much going on before earning season. Stay tune for stock of the year!
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