As Washington enjoyed its 4-day vacation digging out from recent blizzards, markets celebrated the lack of news from politicians to post positive results and temporarily halt the 8% correction we have seen since January 19. News overseas seems to be driving these markets as debt concerns in Greece, Chinese banks increasing reserves and euro weakness all weigh on this very fragile global recovery.
Last Week: Bolstered by news that the European Union would take the necessary steps to support Greek debt, markets broke a 4-week slide to establish gains across all major indexes last week. The Dow finished up 87 points, or 0.8%, to close at 10,099. The S&P 500 rose 9 points, or 0.9%, to finish at 1,076. Finally, the Nasdaq rallied 42 points, or 2%, to close at 2,184. European and Asian markets were both up around 1.5% last week.
In corporate news, Motorola announced plans to split into two companies by early next year. One company would consist of handsets and TV box tops while the other would be for telecommunications gear and equipment. Also, former Merrill Lynch CEO John Thain has a new job as he assumes the reins at troubled lender CIT Group.
In economic news, Fed Chairman Ben Bernanke began outlining the Fed’s plans to slowly withdraw its liquidity and loose monetary policy by possibly raising the discount rate. This is the borrowing rate the Fed uses to lend to banks. Other economic data proved mixed as consumer sentiment worsened, however, retail sales for January were a little higher than expected.
This Week: In addition to the abbreviated trading week in the U.S., Chinese markets are closed all week as the nation welcomes the Year of the Tiger. Nevertheless, expect markets to be on edge as they look to digest a good mix of earnings reports from companies like Barclays, Hewlett Packard, Devon Energy, Waste Management and Merck.
The economic calendar should shed some additional light on the current state of this recovery as we expect to see housing starts, leading economic indicators and pricing data this week. Both PPI (producer price index) and CPI (consumer price index) are due to be released. Markets use CPI as a gauge of inflation so that will be watched closely. Also, data is expected on U.S. credit card defaults. We shall see just how debt-burdened consumers appear to be.
Portfolio News: While Wall Street monitors the debt levels in Europe, the dollar has quietly reached a 9-month high against the euro. This is in sharp reversal to last year when the dollar was very weak due to inflation worries resulting from heavy government stimulus, low interest rates and the Fed’s extreme liquidity maneuvers. Those inflation worries have yet to come to pass nor do we see any indications of it materializing. That is good news for bond investors and also for stocks that historically do well in times of low interest rates and low inflation.
We are mindful of the fact that one of the key components in international investing is the currency impact. A weak dollar adds to returns from international investments. So we are being careful now, especially in emerging markets, that a stronger dollar could hurt returns overseas. It is too early to argue that the dollar will stay strong however, especially given the enormous debt we are incurring as a nation ourselves.
Our view right now is to continue to focus on high-quality stocks with strong cash flows and disciplined balance sheets. Although we maintain a defensive bent, the recent market correction could lead us to look at more cyclical areas of the market in order to participate in a sudden rally. Earnings reports continue to be fairly strong and if the debt concerns can be contained, the current landscape looks good for stocks.