Against a backdrop of mixed economic reports, stocks stumbled last week as all of the major averages took it on the chin. The Dow Jones Industrial Average, which was down five of the past six trading days, lost 1.57% on Wednesday, its sharpest percentage decline in seven weeks. Gold prices approached $400 an ounce on Thursday, a 7 1/2-year high while the 30-year Treasury bond fell below 5%. For the week the Dow lost 331 points (-3.42%) and closed at 9313. The NASDAQ also took a beating as it fell 113 points (-5.93%) for the week and closed at 1792.
The quarterly earnings preannouncement season begins in earnest this week as corporations that are unlikely to meet profit and revenue estimates come clean ahead of time. The bar has been set very high, as Thompson First Call estimates that earnings on the S&P 500 will increase 16% from a year ago. For equity prices to be sustainable, most companies will have to both meet these elevated expectations and give positive guidance for the end of the year.
THE COMPASS PORTFOLIOS
No changes to our models again this week. Last week we indicated that all of the major indexes were ahead of themselves and that a pullback would be normal. However, the degree to which several of the growth segments retreated was certainly unexpected. Our readings indicate oversold conditions, indicating that a bounce back up (or stability at least) is expected. The current quarter is coming to a close, and just as it has done for the last two quarters the market is stumbling to the finish line. Large institutions are taking drastic steps to protect the quarter’s gains, and we expect the volatility to balance itself out shortly after the 4th quarter begins. However, we stand ready to take action should the downward pressure continue.
U.S. average retail gasoline prices fell sharply over the past two weeks, reflecting the end of the peak summer driving season, according to the Lundberg nationwide survey released on Sunday. The national average for self-serve regular unleaded gasoline fell to $1.62 a gallon in the survey taken Sept. 26, a drop of 10.3 cents from the prior survey. Trilby Lundberg, publisher of the survey, said it was the steepest drop in a two-week period since right after the Sept. 11, 2001, attacks, when U.S. consumer demand was sharply curtailed. Lower gas prices can have a stimulative effect on the economy since manufacturers are able to ship goods at reduced costs.
U.S. consumer sentiment fell unexpectedly in September, a survey showed Friday, as persistent weakness in the job market, high gasoline prices and the ongoing occupation in Iraq took a toll. The University of Michigan’s final September index of consumer sentiment fell to 87.7, below economists’ forecasts of 88.5 and down from 89.3 in August. Sentiment dipped heavily from the preliminary reading of 88.2 at mid-month. Consumer sentiment still is above the nine-year low of 77.6 reached in March at the start of the Iraq war and above its average for the last 12 months. But the recovery in confidence since the end of major hostilities has fallen flat as the ongoing human and financial costs of the post-war occupation add up.
U.S. households do not appear overburdened by their hefty debt loads, even though bankruptcies have reached record highs, Federal Reserve Chairman Alan Greenspan said Friday. “While analyses suggest that, overall, the level of debt is being serviced adequately, a record number of non-business bankruptcy filings reveal that many consumers are experiencing significant financial distress,” Greenspan said in remarks prepared for delivery to a conference sponsored by the Congressional Black Caucus. While he touched briefly on the issue of household debt, Greenspan did not elaborate on his view of the economy or monetary policy in his remarks, which focused on the importance of financial education.