Markets closed mixed for the week again, logging new highs for the S&P 500 and the Dow, while the Nasdaq lost ground due to some earnings misses. So far, Wall Street is experiencing its best month this year since January, buoyed by reassurances from the Fed and generally positive economic data. For the week, the S&P 500 gained 0.71%, the Dow increased 0.55%, and the Nasdaq lost 0.35%.
Fed Chairman, Ben Bernanke, testified before the House and Senate last week and reemphasized his role as the Fed’s chief soother. His comments were very much in line with previous speeches, underlining that the Fed will base quantitative easing decisions on incoming economic data. While asset purchases may indeed be pared back by the end of the year, the program could also be left unchanged should economic data prove to be less than positive.
As if to underscore the delicateness of the economy, housing data released concurrently with Bernanke’s speech seemed to be in favor of leaving asset purchases where they are. June housing starts missed expectations, largely due to a 26.2% decline in multi-family units. The MBA Mortgage Refinance index hit a two-year low, indicating that rising interest rates may be cutting into loan applications. Even so, single-family starts are still up 11.5% from a year ago, and we are wise not to get worked up over every bit of fluctuation in the data.
Second quarter earnings season is in full swing, and the news is mixed. Of the roughly 20% of S&P 500 companies that have already reported, 65% have beat earnings estimates, and 51% have beat revenue estimates. Corporate managers have done a good job of managing investor expectations ahead of earnings season, so that even moderate results look positive. However, revenues are still down as compared to last quarter, indicating that many businesses are struggling with demand. Interestingly, companies that depend on domestic revenue sources are doing better than those that depend on foreign demand.
For the first time in weeks, the Fed will keep a low profile ahead of the FOMC meeting on July 30 and 31, and earnings data will dominate headlines as we head into the second quarter’s busiest reporting period. About a third of the S&P 500 companies are due to report, including heavy hitters like Apple, McDonald’s, Facebook, and Boeing. While positive earnings beats could cause the market rally to continue, volatility is likely and it is also possible that mediocre data could cause a pullback in the short term.
Monday: Existing Home Sales
Wednesday: PMI Manufacturing Index Flash, New Home Sales, EIA Petroleum Status Report
Thursday: Durable Goods Orders, Jobless Claims
Friday: Consumer Sentiment
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