Weekly Review
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July 26, 2010 Stocks found support after another round of upbeat earnings and reassuring words from Federal Reserve Chairman Ben Bernanke. The Nasdaq Composite soared 4.2% for the week, while the S&P 500 jumped 3.6% and the Dow Jones Industrial Average added 3.2%.
There was little in the way of economic data released last week. The focus instead was on earnings and business forecasts for the rest of the year. For the most part, corporate America did not disappoint and provided good second quarter results and somewhat optimistic views on business conditions for the rest of the year. The strong growth in profits stands in contrast to the recent spate of tepid economic reports.
This paradox exists due to the deep recession. Companies cut expenses to the bone and workers worried about their jobs increased their productivity. As the economy recovered, suddenly leaner businesses were able to reap more profits off of marginal increases in sales. However, this phenomenon can only last so long; eventually sales growth will be needed to drive increases in the bottom line. This is where Mr. Bernanke helped to reassure investors.
The Fed chief testified before Congress this past week. He reiterated the recovery continues but noted the weakness in the economy and vulnerability from outside influences, such as Europe. Mr. Bernanke stated the Fed was “prepared to take further policy actions as needed.” Basically, the Fed is saying it is ready to step in if necessary, but will not use more of its ammunition as long as the economy continues to expand.
Europe, cited as one of the chief threats to global economic recovery, released the results of their bank stress tests on Friday. The results were greeted with a collective yawn, as many questioned the validity of the tests. However, the fact the tests are over and there were no negative surprises removes yet another piece of the unknown. Anything that removes uncertainty from the market is positive for investors.
This week is loaded with economic information and more earnings results. Fortunately, Monday got off to a good start on both fronts. The Commerce Department reported new home sales were higher than anticipated in June and FedEx, which is often used as a barometer of overall business activity, released a good earnings report and stated its delivery activity is doing better than expected.
The stock market has been locked in a pitched battle between optimists and pessimists. Gone is the relative volatility-free trading that took place last year. This makes the short-term direction of the market very hard to predict. However, investors are seemingly reacting to sharp short-term moves by doing the opposite; rallies are sold and sell-offs are bought. The long term is much easier to predict, as corporate earnings have a very strong correlation to stock market performance. Insight remains confident in the long-term profit prospects of the companies in which it invests. With valuations low and the Fed expected to be in an accommodative mode for an extended period, investors can expect positive results with increased confidence the farther out their investment horizon.
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July 29, 2010
Stocks found support after another round of upbeat earnings and reassuring words from Federal Reserve Chairman Ben Bernanke. The Nasdaq Composite soared 4.2% for the week, while the S&P 500 jumped 3.6% and the Dow Jones Industrial Average added 3.2%.