Market Comments for 7/27/2010

Showing that there is still life and growth in the business sector of the economy, companies reported impressive profits and, even more importantly, offered fairly positive thoughts on future guidance as they recently released their latest round of earnings.  
  
Last Week 
Driven by an improving earnings climate, encouraging stress test results from Europe and expanding global demand for goods and services, Wall Street continues to grind higher in July. Specifically, the Dow was up 3.2% last week, to finish at 10,424. The S&P 500 rallied 3.6% to close at 1,102. The Nasdaq rose 4.2%, pushing the index to 2,269.   

The credibility of Europe’s banks stress tests were called into question as almost all of the banks passed with little trouble. Still, markets have slowly started to feel more comfortable with the state of European economies and seem to have moved on from fears of a debt collapse that sent stocks reeling back in May.

Earnings season continues to drive stocks higher as most companies are beating their profit estimates. Verizon, Caterpillar and American Express are examples of stocks from three different sectors that reported stellar profits reflecting a pick-up in global demand. Financial stocks like Morgan Stanley and Wells Fargo also rose, bolstered by trading profits and reduced loan losses.

Even some cautionary comments from Fed chairman Ben Bernanke were eventually brushed aside by Wall Street. Bernanke described the economy as “unusually uncertain” and indicated that the Fed would stand ready to intercede again if needed. In addition, recent jobless claims moved higher last week.

This Week
Markets received an early boost as yesterday’s new home sales report came in higher than expected. Housing inventories are slowly coming down and builders are working harder to market and sell their homes. More economic data that could impact trading, including consumer confidence, preliminary second quarter GDP and durable goods orders, are scheduled to be released this week.

Earnings season continues as a wide range of companies including BP, DuPont, Newmont Mining and Kellogg are just some of the stocks that will be in the news.

Portfolio Impact  
Despite large daily swings in the stock market, here we are in late July analyzing a market that is basically flat on the year. It has become a daily battle between sluggish  economic data in housing and unemployment versus a resurgent private sector bolstered by stronger balance sheets, reduced costs, higher margins and record levels of cash on-hand. Throw in Europe’s debt woes and the BP oil spill and we have a lot of issues to choose from, each weighing on the market and causing added volatility.

Another positive development that has sparked this July rally has been the trend in stocks raising their dividends. In a lot of cases now, the dividend yield of a large cap stock is higher than a typical bond yield. This could be a positive catalyst for a further stock market rally as investors think twice about low interest rates and seek alternatives for their money. On the other hand, as the economy slowly grinds forward, conviction in stocks continues to be fairly low as trading volume is much less on “up” days as compared to “down” days.

Despite low yields driven by an increased demand for fixed income, we are finding some value in the bond market although it is becoming much harder. Most bonds sell at a pretty high premium and we are being selective in building bond ladders that incorporate good quality, competitive yields and reasonable maturity length (usually under 10 years). We are also finding some good bond mutual funds and ETF’s that offer some attractive return potential (especially compared to cash) and can nicely complement individual bonds currently in your portfolio.