The DJIA ran into a brick wall late last week following a 447-point rally on Monday as a series of bad economic surprises hit the market hard. Despite the selloff, the Dow Jones Industrial Average managed to end the period in the plus column for the second week in a row. For the week the Dow gained 49 points (+0.6%) and closed at 8313. The NASDAQ also rallied on Monday but gave it all back over the next four sessions as it lost 15 points for the week (-1.2%) and settled at 1247. For the month of July, the NASDAQ fell 9.22% making it the worst July since the NASDAQ’s inception in 1971.
Just because July is over, and Congress made progress on corporate reform before the Fall elections, it doesn’t mean the coast is clear for a skyrocket ride in stocks. As the month closed, the Commerce Department disclosed that the economy advanced at a measly 1.1% in the second quarter. There’s a real likelihood that another corporation – or two – could acknowledge that it took advantage of creative accounting techniques in order to boost earnings before CEOs have to sign off on financial statements on August 14.
Monday’s 5% plus upward move appears purely technical in nature, as there was no significant corporate earnings news that may have fueled the rally. Rather, it appears that institutional investors are starting to “bottom feed” for perceived values, and to put some of the excess sideline cash to work.
The first day of August (Thursday) kicked off the month with a selloff that recalled July, and investors shuddered. Whereas the selling in July appeared to track a parade of handcuffed corporate miscreants and to a lesser extent disappointing forward earnings guidance, the selling on August’s first day reflected a worrisome trend in recent economic data. As for stocks, even the most buoyant market would be hard-pressed to avoid a profit-taking session or two after gaining 1300 points in less than two weeks, as the Dow did.
THE COMPASS PORTFOLIOS
The upward surge of the past two weeks offered a convenient and elevated exit point, as our final invested position was removed. The downgrade comes on the heels of tremendous volatility (both up and down), indicating a continued lack of clarity as to the direction of the markets. Without a clear change in sentiment, and with the economic backdrop now faltering, the risks of being invested appear to outweigh the rewards. We are at a critical juncture in the market, and both fundamental and quantitative data need to be analyzed daily to effectively manage investment risk. I pledge the full resources of The Appleton Group to this critical task, knowing that managing investment risk is of paramount importance to you.
U.S. economic growth faltered sharply during the second quarter and began the year at a slower pace than previously thought, the government said on Wednesday in a report that also confirmed a prolonged economic downturn last year.
The Commerce Department said gross domestic product, or GDP, advanced at a 1.1 percent seasonally adjusted annual rate during the April-June second quarter — half the 2.2 percent rate estimated by Wall Street economists. That followed a revised 5 percent rate of increase in the first quarter that previously was reported as a more robust 6.1 percent gain.
The benchmark revisions to GDP, including a three-quarter recession in 2001 and 5% not 6% growth in the first quarter, indicate that there is less economic bedrock on which to build the current advance. And the just-reported 1% growth in second-quarter GDP, even before the horrendous July stock sell-off, compounded concerns born of other headline data. Those data points included weak consumer sentiment and confidence, drops of 4%, 2% and 11%, respectively in June durable orders, construction spending, and new home sales, and the weakest ISM (manufacturing) reading in July since November 2001.
Recovery among several early “bounce back industries,” such as basic materials, transportation, and industrials, may be slower in coming but none-the-less remains on track.