February 23rd, 2011 11:45 AM by Mel Samick
The Dow Jones industrial average continued climbing on Friday, notching its third straight week of gains. The S&P 500 was up 1 percent in the past week to 1,343, the Dow up nearly a percent to 12,391, and the NASDAQ was up 0.9 percent at 2,833. The S&P is now up 6.8 percent for the year and 27 percent since September 1 and the NASDAQ is now 25 points away from reaching a 10-year high. Analysts and traders have been watching for the pullback that doesn't seem to come. Better manufacturing reports and stronger profits from Dell Inc., McDonald's Corp. and other companies have pushed stocks higher this month. With the earnings season coming to a close, nearly 70 percent of the companies in the S&P 500 that reported results so far have beat analysts' expectations. In recent weeks, the steady stock market rally, events in the Middle East and trouble with state finances in the U.S. have taken center stage and pushed the Euro crisis to the back of investors' minds.
Traders have been watching peripheral European sovereign debt with increasing interest for the past several weeks, and Portugal tops the list. Portugal's bench-mark 10-year has been trading with yields above 7 percent for the past 10 sessions. Over the weekend, European Central Bank President, Jean-Claude Trichet, called on Portugal and the rest of the Euro zone to get their houses in order. The IMF has called on the Euro zone to have a credible plan in place before EU heads of state meet next month, and reports indicate the Germans are again pushing for Lisbon to agree to a bailout as soon as possible. If previous EU responses to the Euro crisis are any guide, investors should not be expecting a highly-coordinated, shock-and-awe approach like those we have seen from U.S. authorities. How this plays out in the market over the next few weeks is difficult to call, but expect a volatile month for both the Euro and the European bond market.
So why should we care what's going on in Europe? The devaluation of the Euro triggered by the debt crisis will make American exports more expensive. This will hurt U.S. exports. During the last couple of years, government spending and exports have been the only two growth engines of the American economy. The recovery now requires very strong corporate spending to fill the holes left by American consumers. One way to spur corporate spending is to sell overseas. Since Europe is the largest export market for the U.S., a sharp rising dollar is going to severely impact one of the two recovery engines of the U.S. economy.
The coming week has a heavy economic calendar packed into four trading days, as markets were closed Monday for the Presidents' Day holiday. Existing Home Sales, Housing Price Data, Consumer Confidence and Durable Goods are among the economic releases. On Friday, the government releases its revision to fourth-quarter GDP. A flurry of retail earnings dominates the coming week's earnings calendar with Wal-Mart, Home Depot, and Berkshire Hathaway reporting.
Information provided by NYCB Capital Markets