This past week, the direction the markets took heavily depended on the willingness of Europe to help bail out Greece from its fiscal problems. Also from overseas, China weighed in with tightening of monetary policy. On the U.S. front, a few indicators got market attention as did testimony that Fed Chairman Bernanke did not get to deliver in person. But net, markets were relieved that the odds of default by Greece on its sovereign debt had gone down.
Recap of US Markets
Equities managed a nice gain for the week despite sharp swings in both directions all week. News impacting U.S. stocks over the period mainly came from overseas although domestic reports on economic indicators also came into play along with the Fed.
Worries whether Greece would default on its debt bumped stocks down sharply on Monday (with the Dow closing below 10,000 the first time since November) but favorable prospects on Tuesday for a bailout of that country by the European Union led to a sharp rebound day. The potential for default by Greece is creating much angst because if that country defaults, it could lead to the same in other European nations, including Portugal, Ireland, Italy and Spain.
At midweek, company news sent stocks back down as Sprint Nextel announced sales that fell short of expectations and Dean Foods released its profits forecast which came in below analysts’ estimates. But the big mover was Fed Chairman Ben S. Bernanke, rather his prepared remarks for the House Financial Services Committee on the Fed’s exit strategy from its current, loose monetary policy. Although the hearing was postponed due to snow, the Fed released Bernanke’s prepared testimony. On news that the Fed may soon be raising the discount rate, equities swooned.
Equities jumped Thursday after European leaders—notably from Germany—pledged to help Greece manage its debt and avoid default. Also, a sharp drop in initial jobless claims helped boost stocks for the day. The last day of the week was mixed after China announced the second increase in a month for reserve requirements for its banks, sending U.S. stocks down. China’s move is intended to contain inflation pressures. Also weighing on equities was an unexpected decline in consumer sentiment for February and weak economic indicators from Europe.
Equities were up this past week. The Dow was up 0.9 percent; the S&P 500, up 0.9 percent; the Nasdaq, up 2.0 percent; and the Russell 2000, up 3.0 percent.
For the year-to-date, major indexes are down as follows: the Dow, down 3.2 percent; the S&P 500, down 3.6 percent; the Nasdaq, down 3.8 percent; and the Russell 2000, down 2.3 percent.
The bottom line
The economy is muddling along in the first quarter of the year as the consumer sector has done its part to keep the recovery afloat. And continuing gains in exports also have provided significant support. But near-term gains in the strength of the recovery are in doubt if the consumer does not become more optimistic. Given the current status of the jobs market, the consumer is not likely to be too happy in the near term.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.