Economic reports on jobs, manufacturing and the consumer could be what trips up stocks in the week ahead, deflating some of July's 7 percent gain.
About a third of the S&P 500 companies report earnings. Investors may, however, pay more attention to any other measure that casts light on the strength of the economy or the consumer, including Tuesday's important monthly auto sales. The July employment report, released Friday, is the most important economic report.
"We're going to lose that catalyst we had, which was better than expected earnings," said Jefferies managing director Art Hogan. "The problem is we've run out of steam."
"We probably will have more inclination to be concerned about the pace of the economy and will trade off on it," said Hogan. "...If we're shifting our focus to economic data versus earnings, the tendency of that has been to be a negative catalyst rather than a positive catalyst."
The S&P 500 companies reporting so far have seen quarterly profit increases of 45 percent on average. Of those companies, 75 percent topped earnings estimates and 64 percent beat revenue expectations. A mix of consumer, media, insurers and financial companies dominate the coming week's calendar, and the companies reporting include Procter and Gamble [PG 61.16 -0.51 (-0.83%) ], Kraft [KFT 29.21 0.10 (+0.34%) ], Time Warner [TWX 31.46 0.20 (+0.64%) ], News Corp [NWS 14.79 0.17 (+1.16%) ], MasterCard [MA 210.04 1.67 (+0.8%) ] and Berkshire Hathaway
[BRK'B 78.12 0.08 (+0.1%) ]. (See the full earnings calendar here.)
Stocks in the past month have seen an earnings bounce, as they struggled against a patch of weaker economic reports. The market was nearly flat Friday, overcoming an initial sell off after second quarter GDP of 2.4 percent disappointed some investors and sent economists to work adjusting their second half forecasts.
Mark Zandi of Moody's Economy.com is one of those looking to revise his third quarter GDP forecast, and he may trim it to under 2 percent. "One very big concern was a very large contribution of inventories to Q2 and that sets us up for a soft Q3. That's consistent with the idea the economy is growing but still below trend, and that gets to the employment report of next week," he said.
Zandi expects a decline of 50,000 non farm payrolls for July, including the elimination of 150,000 government census workers. He expects to see private payrolls grow by 100,000. In June, the economy added 41,000 non farm payrolls.
Stephen Stanley, chief economist at Pierpont Securities, expects a decline of 100,000, including a reduction of about 150,000 census workers. He said some consumer driven data in the coming week may show some signs of improvement.
"June was clearly a very soft month for the economy. My sense is July is better. The reports on auto sales are going to be up for the month...The weekly numbers suggest consumers were spending at the mall again," he said.
Whither Stocks
The Dow, up 7 percent for the month, ended up just slightly on the week, gaining 41 points to 10,465. The S&P 500 was up just 1 point for the week, to 1101, but it is up 6.9 percent for the month. The Nasdaq was up 14 points for the week, to 2254, and it has a 6.9 percent gain for the month. Materials shares were the best performers in July, up 12 percent, followed by industrials, up 10 percent. The worst performing major S&P sector was health care, up just 1.3 percent.
"The market's volatile and that's going to continue to be the case. I don't think we're up, up and away. Earnings season has been good generally, but not as good as last quarter," said Stuart Freeman, chief equity strategist at Wells Fargo Advisors.
"We think we're going to see more up and down, up and down volatility. It's possible we move a little higher into the late earnings season, but it's possible we come down in the fall," he said.
Freeman said unlike last year when the market was in a strong recovery, stocks are likely to respond in a more traditional way to seasonal factors and could face a choppy September and October.
"We would expect it to be volatile just because it's a mid-cycle election year, which often causes some consternation and volatility in the market," Freeman said. He expects the market to rise once again after the election is over.
The S&P 500 this past week closed above its 200-day moving average of 1113, but then slid below it. "It doesn't really tell you much about what's going to happen with the fundamentals. I guess that we're sitting at that point where it's going to lead to volatility as we bounce under and over it. There's a good chance we go back over it., but I think that we probably go back under too," said Freeman of the 200-day.
"I think if we don't see some more pullbacks between now and the middle of October, and it looks like investors are feeling better by that period of time, we may have passed through an important period of risk there. Between now and the early part of October, if the seasonal factors and fears of slowing aren't born out in the data we're getting, we may be getting ready to create that second leg up already," he said.
"Our target is still 1100 to 1140 (on the S&P 500) at the end of the year, and I don't think we're going to see it in a straight line," said Freeman.
In the past month, 20 companies in the S&P 500 increased dividends, according to Standard and Poor's. That compares to just eight in the same month last year.
"Yields are so low by historical standards that (dividend yields) are higher than the 10-year Treasury, which you don't get often," said Jack Ablin, CIO of Harris Private Bank.
Ablin has been cautious on the market ever since the S&P fell 5 percent below it's 200-day moving average on June 8.
"Actually, I wouldn't mind if you just clip a dividend and keep your head down," said Ablin. "What we're seeing is in this kind of market is go for dividends right now and growth. It's possible it could come from some other place, but at this stage, dividends to me have a much higher degree of certainty than the prospects for higher revenues."
Ablin said there is a chance the market could surprise on the upside. "It's one of those things where from a technical standpoint, if we break out we're going to add some risk. But we're likely to do it in some place out of the way, like real estate, not equities. Aside from that, I don't see a huge catalyst to the upside unless all of a sudden these temporary jobs turn into full time jobs," he said.
Treasurys this past week saw yields in some durations gap to record levels against the 30-year bond. The gap between the 10-year and 30-year yields reached 110 basis points at one point Friday. It had been about 90 in the spring. The yield on the 10-year was at 2.91 percent Friday, while the 30-year was at 3.99 percent, down from 4.03 percent a week earlier.
"The market could clearly be vulnerable to stronger data at these yield levels," said John Briggs, Treasury strategist at RBS. He pointed to the surprising strength in Chicago Purchasing managers data Friday.
"It will be interesting to see if the ISM confirms that. Chicago was the first growth indicator that went the other way," said Briggs, noting if the ISM confirms that story it will surprise the market.
The dollar was down 0.89 percent on the week against the euro, and is down 6.2 percent for the month, at a level of $1.3033.
"The dollar is the only constant mover this week," said Brian Dolan of Forex.com. "We can see some stabilization and consolidation, but the risk is the dollar breaks down further and we see more dollar weakness on data, and just on flows."
What to Watch
In addition to U.S. data, investors will be watching China's PMI, released overnight New York time on Sunday. There is also a speech on the economy from Fed Chairman Ben Bernanke Monday.
Bernanke's topic is challenges for the economy and state governments, and he speaks at 10:15 a.m. New York time before the Southern Legislative Conference annual meeting in Charleston, S.C. Treasury Secretary Tim Geithner also speaks Monday afternoon, on financial reform at New York University's Stern School at 4 p.m.
Other important reports include ISM manufacturing data Monday and ISM non manufacturing Wednesday. Both of those reports hold a key employment component.
Personal income is released Tuesday, and consumer credit is reported Friday. Economists will be watching monthly auto sales Tuesday and chain stores' monthly sales Thursday for clues as to the consumers' willingness to spend. ADP's employment report is Wednesday and weekly jobless claims are Thursday. Pending home sales are reported Tuesday.
The European Central Bank and Bank of England hold rate meetings Thursday.
Saturday, July 31, 2010
Friday, July 30, 2010
Economists Expect Slower Growth in Second Half - CNBC
Two steps forward, one step back. That describes the current thinking about a year into the putative economic recovery.
On Friday, the government will release its report on the nation’s output for the second quarter, showing how much, if at all, the economy downshifted as the summer began.
Many economists — concerned about the sluggish pace of job creation, dwindling housing activity and decelerating retail sales — say that slowdown is continuing this summer and have recently downgraded their expectations for the second half of the year.
“Practically every Street economist took a knife to Q2 and Q3 G.D.P. growth,” David A. Rosenberg, chief economist for Gluskin Sheff, wrote last week in a note to clients, referring to Wall Street forecasts for gross domestic product. For the second-quarter results to be released Friday, economists project a modest annualized gain of 2.6 percent, down from 2.7 percent in the first quarter and 5.6 percent in the final quarter of last year.
Though some people started the year hoping for stronger results, economists say that the slow pace of growth should have been expected.
“So far, the recovery is remarkably normal for a postfinancial-crisis recovery,” said Kenneth S. Rogoff, a professor at Harvard and co-author, with Carmen M. Reinhart, of “This Time Is Different,” an economic history of financial crises.
“It doesn’t mean that we should cheer that it’s been so grim,” added Mr. Rogoff, who is a former chief economist of the International Monetary Fund. “But on the other hand, it’s not necessarily a reason to panic.”
Even shares in companies that are more ebullient, likeDelta Air Lines and Amazon.com, have been driven down by nervous investors when executives announced plans to increase capacity or hire aggressively.
Perhaps Ben S. Bernanke, chairman of the Federal Reserve, put it best this month when he described the outlook for the United States economy as “unusually uncertain.”
The news in recent weeks has been rather bleak. A crucial index of consumer confidence, which was rising strongly earlier this year, dropped for the second month in a row in July, while sales of existing homes have fallen for two consecutive months. Employers are adding fewer jobs than they were just a few months ago, and banks are lending less to companies than they were a year earlier, even after relatively good second quarter-corporate profits.
Earlier this year, expectations were much higher. The National Association of Home Builders, for example, forecast that buyers would sign contracts for 467,000 new homes this year; now it is projecting that they will buy just 375,000 homes — down almost 20 percent.
“We just thought that overall, the economy would have been doing better than it’s been doing,” said Bernard Markstein, senior economist with the home builders.
At the start of the year, manufacturing seemed to be staging a comeback as companies replenished inventories that fell very low during the recession. Many economists assumed that once products were back on shelves, consumers would start buying enough to deplete warehouse inventories. Now, consumer demand appears not quite strong enough.
Many companies that have reported impressive results this earnings season, including bellwethers like United Parcel Service and 3M, indicated that their sales swelled mostly outside the United States.
As a result, companies are still not hiring nearly as many people in the United States as policy makers — and the unemployed — want. The unemployment rate, at 9.5 percent, is not far off the peak of 10.1 percent, and 6.75 million people have been out of work for more than six months.
Part of the slowdown stems from the expiration of stimulus measures like the home buyer tax credit and the cash for clunkers program to bolster auto sales. But it is also perhaps the inevitable aftermath of a protracted era of credit-driven excess, buoyed by inflated housing prices.
Earlier this year, some economists projected stronger growth rates in part because they were looking at recessions in the early 1990s and the early 1980s. The problem with such analogies is that the latest recession was precipitated by a financial crash rather than more cyclical boom-and-bust factors.
Many Wall Street economists and investors have “been too willing to see this as a normal cyclical event distorted by some crazy things going on in housing,” said Ian Shepherdson, chief United States economist at High Frequency Economics, “whereas this was almost entirely driven by what was going on in the financial markets and houses.”
Consumers who used their skyrocketing home values to borrow ever larger sums of money to feed further spending are now paying off that debt, which hampers their spending. That process is “very slow and painful,” said Joshua Shapiro, chief United States economist at MFR Inc. “There is not that much that can be done about it, as much as politicians would love to find some silver bullet.”
In fact, politicians are debating quite ferociously whether more needs to be done to usher the economy along. The fiercest arguments are over whether to inject further stimulus spending into the economy and whether to let the tax cuts for the wealthy enacted under President George W. Bush expire at the end of the year.
There are those who argue that the current slowdown is just a hiccup, caused in part by tremors in Europe and concerns about a hard landing in China.
“We were hit by these shocks,” said Bernard Baumohl, chief global economist at the Economic Outlook Group. “But as we get additional evidence that the European economies are able to withstand the debt crisis and as banks are showing they have stronger capital and Chinese policy makers are successfully able to avoid any sharp downturn, that will be reflected in higher confidence among U.S. businesses and consumers.”
On the ground, slow growth has spawned a cautious mood that is feeding — you have it — slow growth.
“A lot of people are looking at things with the glass half empty,” said Douglas C. Yearley Jr., chief executive of Toll Brothers, the home builder. “And they’re temporarily on the sidelines.”
Companies, meanwhile, are not yet ready to capitalize on good news. Although 3M, which makes things as diverse as Post-it Notes and screen coatings for iPads, announced strong earnings growth in the second quarter, its chief executive, George W. Buckley, told analysts that he expected a slowdown in the second half and that “hiring will likely be low.”
At U.P.S., the company’s familiar brown trucks delivered an average of 153,000 more packages a day in the United States during the second quarter than in the comparable period a year earlier.
But the company, which has about 18,000 fewer people in package sorting centers and on driving routes in the United States than at its peak two years ago, said it was not yet hiring in great numbers. “The bottom line is that the growth in the U.S. just isn’t quite there in terms of generating jobs right now,” said Norman Black, a U.P.S. spokesman.
Industrial companies may wait to hire until early next year, after they have maximized productivity gains among current workers. “Traditionally, when you come out of a down cycle, there’s normally a fairly high reluctance to hire,” said Scott R. Davis of Morgan Stanley. “Investors and boards of directors don’t want to see them hire people until business is 100 percent back.”
Some businesses are desperate to hire but just do not see the demand to justify it. Dan Cutillo, the owner of a string of pizza delivery shops near Toledo, said penny-pinching customers are not ordering as much. At one of his stores, he said, the staff is now half the size it was a year ago.
“I should be doing larger sales,” Mr. Cutillo added. “I should be hiring more people.”
This story originally appeared in the The New York Times
On Friday, the government will release its report on the nation’s output for the second quarter, showing how much, if at all, the economy downshifted as the summer began.
Many economists — concerned about the sluggish pace of job creation, dwindling housing activity and decelerating retail sales — say that slowdown is continuing this summer and have recently downgraded their expectations for the second half of the year.
“Practically every Street economist took a knife to Q2 and Q3 G.D.P. growth,” David A. Rosenberg, chief economist for Gluskin Sheff, wrote last week in a note to clients, referring to Wall Street forecasts for gross domestic product. For the second-quarter results to be released Friday, economists project a modest annualized gain of 2.6 percent, down from 2.7 percent in the first quarter and 5.6 percent in the final quarter of last year.
Though some people started the year hoping for stronger results, economists say that the slow pace of growth should have been expected.
“So far, the recovery is remarkably normal for a postfinancial-crisis recovery,” said Kenneth S. Rogoff, a professor at Harvard and co-author, with Carmen M. Reinhart, of “This Time Is Different,” an economic history of financial crises.
“It doesn’t mean that we should cheer that it’s been so grim,” added Mr. Rogoff, who is a former chief economist of the International Monetary Fund. “But on the other hand, it’s not necessarily a reason to panic.”
Even shares in companies that are more ebullient, likeDelta Air Lines and Amazon.com, have been driven down by nervous investors when executives announced plans to increase capacity or hire aggressively.
Perhaps Ben S. Bernanke, chairman of the Federal Reserve, put it best this month when he described the outlook for the United States economy as “unusually uncertain.”
The news in recent weeks has been rather bleak. A crucial index of consumer confidence, which was rising strongly earlier this year, dropped for the second month in a row in July, while sales of existing homes have fallen for two consecutive months. Employers are adding fewer jobs than they were just a few months ago, and banks are lending less to companies than they were a year earlier, even after relatively good second quarter-corporate profits.
Earlier this year, expectations were much higher. The National Association of Home Builders, for example, forecast that buyers would sign contracts for 467,000 new homes this year; now it is projecting that they will buy just 375,000 homes — down almost 20 percent.
“We just thought that overall, the economy would have been doing better than it’s been doing,” said Bernard Markstein, senior economist with the home builders.
At the start of the year, manufacturing seemed to be staging a comeback as companies replenished inventories that fell very low during the recession. Many economists assumed that once products were back on shelves, consumers would start buying enough to deplete warehouse inventories. Now, consumer demand appears not quite strong enough.
Many companies that have reported impressive results this earnings season, including bellwethers like United Parcel Service and 3M, indicated that their sales swelled mostly outside the United States.
As a result, companies are still not hiring nearly as many people in the United States as policy makers — and the unemployed — want. The unemployment rate, at 9.5 percent, is not far off the peak of 10.1 percent, and 6.75 million people have been out of work for more than six months.
Part of the slowdown stems from the expiration of stimulus measures like the home buyer tax credit and the cash for clunkers program to bolster auto sales. But it is also perhaps the inevitable aftermath of a protracted era of credit-driven excess, buoyed by inflated housing prices.
Earlier this year, some economists projected stronger growth rates in part because they were looking at recessions in the early 1990s and the early 1980s. The problem with such analogies is that the latest recession was precipitated by a financial crash rather than more cyclical boom-and-bust factors.
Many Wall Street economists and investors have “been too willing to see this as a normal cyclical event distorted by some crazy things going on in housing,” said Ian Shepherdson, chief United States economist at High Frequency Economics, “whereas this was almost entirely driven by what was going on in the financial markets and houses.”
Consumers who used their skyrocketing home values to borrow ever larger sums of money to feed further spending are now paying off that debt, which hampers their spending. That process is “very slow and painful,” said Joshua Shapiro, chief United States economist at MFR Inc. “There is not that much that can be done about it, as much as politicians would love to find some silver bullet.”
In fact, politicians are debating quite ferociously whether more needs to be done to usher the economy along. The fiercest arguments are over whether to inject further stimulus spending into the economy and whether to let the tax cuts for the wealthy enacted under President George W. Bush expire at the end of the year.
There are those who argue that the current slowdown is just a hiccup, caused in part by tremors in Europe and concerns about a hard landing in China.
“We were hit by these shocks,” said Bernard Baumohl, chief global economist at the Economic Outlook Group. “But as we get additional evidence that the European economies are able to withstand the debt crisis and as banks are showing they have stronger capital and Chinese policy makers are successfully able to avoid any sharp downturn, that will be reflected in higher confidence among U.S. businesses and consumers.”
On the ground, slow growth has spawned a cautious mood that is feeding — you have it — slow growth.
“A lot of people are looking at things with the glass half empty,” said Douglas C. Yearley Jr., chief executive of Toll Brothers, the home builder. “And they’re temporarily on the sidelines.”
Companies, meanwhile, are not yet ready to capitalize on good news. Although 3M, which makes things as diverse as Post-it Notes and screen coatings for iPads, announced strong earnings growth in the second quarter, its chief executive, George W. Buckley, told analysts that he expected a slowdown in the second half and that “hiring will likely be low.”
At U.P.S., the company’s familiar brown trucks delivered an average of 153,000 more packages a day in the United States during the second quarter than in the comparable period a year earlier.
But the company, which has about 18,000 fewer people in package sorting centers and on driving routes in the United States than at its peak two years ago, said it was not yet hiring in great numbers. “The bottom line is that the growth in the U.S. just isn’t quite there in terms of generating jobs right now,” said Norman Black, a U.P.S. spokesman.
Industrial companies may wait to hire until early next year, after they have maximized productivity gains among current workers. “Traditionally, when you come out of a down cycle, there’s normally a fairly high reluctance to hire,” said Scott R. Davis of Morgan Stanley. “Investors and boards of directors don’t want to see them hire people until business is 100 percent back.”
Some businesses are desperate to hire but just do not see the demand to justify it. Dan Cutillo, the owner of a string of pizza delivery shops near Toledo, said penny-pinching customers are not ordering as much. At one of his stores, he said, the staff is now half the size it was a year ago.
“I should be doing larger sales,” Mr. Cutillo added. “I should be hiring more people.”
This story originally appeared in the The New York Times
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