August 5th, 2009 1:23 PM by Mel Samick
Investors were in a positive frame of mind this past week while hoping for a better economic outlook ahead. Encouraging economic indicators, as well as better than expected corporate earnings, proved to be major factors influencing investors to believe that the economy has already reached its lowest level. Even The Fed's Beige book, a report card on regional economic health, stated that economic decline is slowing. Still, continuously rising unemployment and rising oil prices gave some investors second thoughts on how fast the economy is recovering. Investors were looking beyond short-term indicators, and that's why in spite of a disappointing consumer confidence report and durable good orders, investors banked on a promising second quarter gross GDP. For the second quarter, GDP increased to a rate of -1 percent, beating the investor's expectation of -1.5 percent.
Rising jobless claims and the rising unemployment rate are putting downward pressure on economic recovery. For the week ending July 25, 584,000 new applications were filed for unemployment assistance. The Employment Cost Index rose by 0.4 percent during the second quarter, with wages rising by 0.3 percent and benefit costs by 0.4 percent; certainly dimming the hope of an improved unemployment rate.
It was a volatile week for stock trading. The stock market saw a tug of war between short sellers and buyers, but in the end, long investors emerged as victorious. For the end of the week, all major indices ended up by nearly 1 percent. Riding high on quarter end profits, the banking sector led the markets with a 4.4 percent gain, while the energy and utilities sector lost 1.6 percent and 2.2 percent respectively. The Consumer Confidence index witnessed some downward movement, but that was due to rising unemployment and oil prices. Treasuries also had a very volatile week. The Treasury auctioned off $115 billion worth of debt this past week to meet government spending demand. Yields on the 2-year went up by 7 bps due to concern of oversupply while the 5-year and 10-year treasury yields went down by 7 bps and 26 bps, respectively. The three-month LIBOR rate also went down by 2 bps.
The housing market gave investors something to cheer about this past week, with better than expected numbers in existing home sales and new home sales. This caused a substantial drop in inventory levels, which declined to 8.8 months. Low interest rates and tax credits were the driving factors for the rise in home sales. 30-year fixed mortgage rates were stuck around 5.25 due to declining 10-year yields.
The coming week will keep investors looking out for rising vehicle sales due to the government-sponsored CARS (Cash for Clunkers) program on Monday, with personal spending and personal income indexes to arrive on Tuesday. Factory orders and ISM non manufacturing composite index will come out on Thursday, which should give investors some insight on the pace of the economic recovery rate.
Info provided by Amtrust Capital Markets