Market Update – 4/16/12: “U.S. Gains; World Falters”

THE MARKETS

It was a rough one for the stock market last week as major indices closed out their worst session of 2012 on the back of disappointing economic growth in China and renewed fears about debt-ridden Europe. The S&P fell 2% for the week, while the Dow lost 1.61%, and the Nasdaq closed down 2.25%.

China, the world’s second-largest economy, reported first-quarter growth figures of 8.1%, the weakest rate in nearly three years, and below expectations of 8.3%. Stocks fell sharply on the news, stoking fears that a weakened Chinese economy could have global implications.[1] Concerns surrounding Spain’s debt offering next week renewed fears about the European debt crisis, battering bank stocks and dragging down the euro against the dollar.[2]

On the other hand, domestic indicators continue to provide a positive contrast to global worries. The most recent Beige Book report released by the Federal Reserve shows that the U.S. economy is improving at a “modest to moderate” pace as solid auto sales, warm weather, and growth in high-tech manufacturing outweighed the effect of high gasoline prices.[3] Sales by U.S. wholesalers rose 1.2% in February, and they restocked their inventories at a faster rate in February than January, suggesting they expect a strong spring. Consumer confidence likewise grew in February by the most in seven months. This is especially good news since consumer spending drives nearly 70% of domestic economic activity; if consumers keep spending, the economy will continue to improve.[4]

Domestically, the U.S. economy really seems to be chugging along, and indicators continue to support a broad recovery. Nevertheless, concerns about the fragile global economy will likely lead to continued volatility in equity markets. The declines experienced over the last two weeks are not difficult to comprehend in light of the outstanding first quarter performance we experienced. In the weeks ahead, analysts will be examining quarterly earnings reports to determine whether the pullback has been exhausted, or if we should expect continued profit taking.

As always, when short-term declines test your resolve, it is critically important to remain focused on your long term objectives and trust that the portfolio strategy you have in place can weather a few squalls.

ECONOMIC CALENDAR


Monday:
 Retail Sales, Empire State Mfg Survey, Treasury International Capital, Business Inventories, Housing Market Index
Tuesday: Housing Starts, Industrial Production
Wednesday: 
EIA Petroleum Status Report
Thursday: Jobless Claims, Existing Home Sales, Philadelphia Fed Survey

PERFORMANCE

apr12 chart0416 Market Update   4/16/12: U.S. Gains; World Falters

 

 

 

 

 

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized.
Sources: Yahoo! Finance, MSCI Barra. Past performance is no guarantee of future results.
Indices are unmanaged and cannot be invested into directly. N/A means not available.

 

HEADLINES

Five years after the U.S. housing bust sent sales and prices plunging, the spring home-buying season is pointing to a long-awaited recovery. Reduced prices, record-low mortgage rates, higher rents, and an improving job market appear to be emboldening many would-be buyers. Earnings reports Friday from two big banks suggested that more people are taking out mortgages. JPMorgan Chase issued 6% more mortgages from January through March than it did a year ago and recived 33% more applications. Wells Fargo issued 54% more mortgages and received 84% more applications.[5]

Oil prices fall on signs of weaker economic growth. Oil slipped below $103 per barrel on news of softening global demand. If the Chinese economy is slowing down, demand for oil could weaken since Chinese industries are one of the primary consumers of petroleum.[6]

Small business confidence dropped sharply in March, indicating that small business owners might be feeling the pinch of high gas prices. According to the report, many entrepreneurs plan on raising prices this year in response to higher energy costs.[7]

Gasoline prices may have already peaked in the U.S. Despite predictions that gas prices would continue their skyward march, the average price of gas nationwide has fallen to $3.90, down 3 cents from a week ago, indicating that the peak might be behind us.[8]

 

Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896.
The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indexes from Europe, Australia and Southeast Asia.
The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
The Housing Market Index (HMI) is a weighted average of separate diffusion indices based on a monthly survey of NAHB members designed to take the pulse of the single-family housing market. Each resulting index is then seasonally adjusted and weighted to produce the HMI.
The BLS Consumer Price Indexes (CPI) produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services. Survey responses are seasonally adjusted and weighted to produce a composite index.
The Conference Board Leading Economic Index (LEI) is a composite economic index formed by averages of several individual leading economic indicators, which are weighted to produce the complete index.
Google Finance is the source for any reference to the performance of an index between two specific periods.
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Past performance does not guarantee future results.
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[2] http://www.bloomberg.com/news/2012-04-14/spanish-bonds-decline-for-second-week-on-debt-contagion-concern.html
[3] http://articles.marketwatch.com/2012-04-11/economy/31323234_1_retail-sales-auto-sales-report
[4] http://www.usatoday.com/money/economy/production/story/2012-04-10/wholesale-inventories-sales-february/54144442/1
[5] http://newssun.suntimes.com/business/11924633-420/home-buying-season-finally-signaling-a-recovery.html
[6] http://news.yahoo.com/oil-falls-signs-weaker-economic-growth-165940471.html
[7] http://www.usatoday.com/money/smallbusiness/story/2012-04-10/small-business-owners-confidence/54158558/1