Tuesday, July 28, 2009

STOCK MARKET REVIEW June/July 2009: Making Sense of All the Economic Data

The recovery is being obscured by a daily barrage of mixed reports and conflicting analysis. To provide context for my next post on sustainable investing and to help illustrate the lingering disagreement between the bulls and the bears I have published excerpts of The Green Market's bi-monthly review of the three major stock indices (Dow Jones Industrial Average, Nasdaq, and the S&P 500) for the period between June 1, 2009 and July 28, 2009.

Some investors are concerned about inflation and higher interest rates. Many are worried that the economy could remain weak for some time.

Most investors seem to be preoccupied with the steady stream of reports coming from authoritative institutions like the Federal Reserve, the Labor Department, the Central Bank, the Commerce Department and The World Bank. But energy futures and new home sales need to be understood alongside stats like unemployment and foreclosures. Jobless claims need to be factored alongside GDP and pending home sales alongside manufacturing data.

An individual piece of data is insufficient in isolation, it needs to be interpreted in context, for example, consumer data must be appreciated as part of an aggregate that includes spending, confidence, income, savings etc.

The effect of economic data is illustrated in the performance of the stock market over the last two months. June began well on the heels of a rally that started in March, however investor hopes were dashed on Wednesday June 3 as stocks retreated due to troubling reports.

Stocks did well on Thursday June 4 with energy, financial and tech shares pushing the market higher and reports indicating declines in the number of individuals seeking unemployment benefits. RBC Capital Markets stated that the worst of the financial crisis is over.

Perhaps most curiously, with the exception of surges on all four Thursdays in June (4, 11, 18, and 25) Wall Street posted mixed results for the entire month.

Early in July it became clear that mixed economic data was dictating the erratic movements of the markets. From July 2 to July 10 a series of reports including job reports, loan delinquencies, and one from the IMF, sent stocks straight back to negative territory.

The consumer confidence report showed an unexpected decline in June and MarketWatch called it an “outright slump in consumer confidence." The markets were up and down all week. On July 3, the last trading day before Independence Day holiday, the much anticipated job report caused the Dow to fall over 200 points and over the course of the week, the Dow finished down 147 points, and the Nasdaq lost 41.

Pre-fourth of July employment numbers continued to reverberate around the markets and between July 6-10, stocks continued to decline for the fourth consecutive week.

On July 13 stocks were up as financial shares boosted the market. The Dow added over 180 points to finish at 8,325 on some good earnings numbers. Wall Street was flat on July 14 but on July 15, stocks surged with the Dow adding an impressive 256 points before ending the day at 8,616. Strong earnings and a positive report from Intel sent stocks soaring during morning trading. Another report showed that industrial companies cut production far less in June than they had in previous months. The Fed also indicated that they now expect that the economy will slide at a slower pace than they had previously forecasted. On July 16 stocks continued to rally, Asian and European markets also ended the day higher.

On July 17, Wall Street went slightly higher adding to the gains for the rest of the week. Construction of new homes and apartments jumped 3.6 percent to the highest level in seven months. Builder permits also rose to 582,000 in June from a revised rate of 562,000. However these positive housing numbers were tempered by mixed earnings numbers.


On July 20 investors continued the previous week's rally on news that the index of leading economic indicators rose 0.7% in June when analysts were only expecting an increase of 0.5%. On July 21 better-than-expected earnings and comments from Federal Reserve Chairman Ben Bernanke continued Wall Street’s positive start to the week as all three major indices ended higher.

On Thursday, July 23 positive earnings results from Google and IBM helped spur the market then on July 24 the Nasdaq declined following some disappointing earnings reports and weak consumer confidence numbers. Although corporate America has done a good job cutting costs, surface reads of earnings reports may be contributing to the rally. For the week of July 20-24 all the major indices posted gains.. However, investors traded with caution in anticipation of the looming stock market "summer slowdown."

On Monday July 27, Wall Street continued its streak from last week, posting significant weekly gains for all three major indices. On Thursday, the Dow Jones closed above 9,000 for the first time since January. For the week the Dow had gained almost 350 points and the Nasdaq gained almost 80.

As has been evident of late, investors continue to pay close attention to the most recent economic and earnings reports

On Tuesday and Wednesday (July 28 and 29) two consecutive reports helped to drag stocks down. First investors recoiled in response to a report on consumer confidence then a disappointing durable goods orders report dragged stocks down further even thought the Fed's beige book, showed signs of an economic recovery. Then on Thursday July 30, good earnings numbers and decent economic data turned stocks around after 2 days of losses. The Dow increased to almost 9,200 for the first time since November.

We can anticipate more mixed results and although consumer confidence remains a concern we have ample evidence to believe that the market has reached a turning point and recovery is within view.

In April the stock market had its best month in nine years and the rally that started in March saw the market grow 40%. In the third week of July the Dow and Nasdaq were up a record 11%. Overall, July was one of the best months in years. The Dow added 17 points and is approaching the 9,200 mark and the S&P will likely hit 1,000 very soon.

Even though the $787 billion stimulus package has yet to impact the GDP, we have seen a positive report that indicates a much slower GDP decline. June home sales are at their highest levels for the year and Federal Reserve Chairman Ben Bernanke is now on the road talking about the recovery.

Investors remain cautious, perhaps this is because--as some are suggesting--we are perched on the surface of another rapidly inflating bubble or perhaps investors cannot see the forest through the trees as they try to assimilate the conflicting array of daily reports.

This is the greatest economic downturn since the Great Depression. As a consequence, the economic data is unavoidably mixed and this is driving the mixed market performances. But eventually investors will realize that despite the near-collapse of the financial system the economy is performing fairly well.

With poor memories and very short time horizons it should come as no surprise that investors remain nervous. However, we would all do well to remember that every crisis has a beginning, middle, and end.
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Next: Investing for a Sustainable Recovery / Solar Stock Review

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Solar Stock: Recovery and Comparative Market Performance
Solar is Under-Performing Markets at Pivotal Rally Points
Solar Sector Analysis
Solar Stock Review: Cost vs Efficiency
Solar Stock Picks: Timing
Energy Efficiency Stock Review: The (Smart) Grid
US Government Spending and Energy Efficiency Stock
Wind Stock Review
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Solar Stock Review
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Market Reaction to Obama's Stimulus
Solar Update: Ongoing Volatility

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