Monthly Market Monitor - August 2010

Markets Rebound as Earnings Season Unfolds
Equity markets reversed course in July after a disappointing June. Many market analysts attribute the rebound to optimistic expectations surrounding the current earnings season. While some companies have yet to report, those that have already reported are generally posting positive results. According to Ned Davis Research, as of July 29th, about 67% of companies in the S&P 500 had reported earnings. Of those, 75% managed to beat expectations, while less than 20% failed to meet estimates. Not only are most companies managing to surprise to the upside, but they are demonstrating strong growth as well. On July 30th, Thomson Reuters reported that the blended earnings growth rate (estimated & reported) for the S&P 500 for Q2 2010 is 36% versus an estimated earnings growth rate of 25% for Q3 2010.

In an unusual twist, consumer sentiment is headed in the opposite direction of the markets. According to the most recent Thomson Reuters/University of Michigan Survey of Consumers, consumer sentiment in July fell to its lowest level in nine months. Given the continued high levels of unemployment, however, the results aren’t all that surprising. The survey showed a fairly dramatic drop as it fell from 76.0 in June to 67.8 in July. The June level was the highest in nearly 2 ½ years. Some strategists point to the large swing as evidence of continued uncertainty with respect to the economic recovery.

Economic Growth Slows
The Commerce Department’s preliminary estimate for second quarter GDP showed growth of 2.4%. This comes on the heels of revised growth of 3.7% in Q1. In particular, the Q2 report noted that the “deceleration in real GDP in the second quarter primarily reflected an acceleration in imports and a deceleration in private inventory investment that were partly offset by an upturn in residential fixed investment, an acceleration in nonresidential fixed investment, an upturn in state and local government spending, and an acceleration in federal government spending.”² Thus it was a rise in imports and a lower inventory investments that caused the slowdown. Nonetheless, the economic recovery continued, albeit at a slower pace.

The slowdown is likely to make the Federal Reserve’s job of managing interest rates more difficult. Some analysts continue to believe that inflation risks loom on the horizon and therefore are calling for higher rates soon. Others, however, see the slowdown as evidence of continued economic weakness and thus argue for an extension of the current low rates. The Fed will have to balance these two concerns in determining interest rate policy going forward.

1. Wall Street Journal, 08/01/10
2. U.S. Department of Commerce, 07/30/10

The views are those of Cameron Lavey, Senior Investment Analyst, Research Department/Cetera Financial Group, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.

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