by Shawn Narancich, CFA
Vice President of Research
Like Punxsutawney Phil who saw his shadow and returned to the burrow for another six weeks of winter, the benchmark S&P 500 Index broke out to a new four-year high, only to retreat and post modest losses for the week. Investors left to wonder if the weather will turn stormy for stocks this fall received a few new clues in the form of disappointingly weak orders for U.S. capital goods and continued weakness in manufacturing measures, both in China and Europe. In the plus column, evidence continues to indicate that a nascent rebound in U.S. housing has begun, with existing and new home sales both up meaningfully in July and accompanied by additional reports of reduced inventories and higher prices. With the release of Fed minutes from the July 31 meeting evidencing a tilt by policymakers toward another round of quantitative easing, Treasuries gained a bid and yields fell to 1.69 percent on the 10-year bond benchmark.
It was only appropriate that Apple became the most valuable U.S. company ever this week, because without its substantial gains, the S&P 500 would not be flirting with new highs. Besides the tremendous earnings growth it has achieved, Apple is also the single largest payer of dividends in the tech sector at a time when investors are seeking to fill income buckets being drained by the bull market in bonds. Representing a disproportionate share of the technology sector in a year when Apple is up 64 percent has helped tech reclaim performance leadership for 2012. Where it ends the year will depend in part on customer acceptance of key products about to be introduced, including the iPhone 5 next month and Microsoft’s new Windows 8 software platform in October.
As the dog days of summer meld into fall, the latest chapter in the European debt saga remains to be written. Preliminary meetings between Greek, German and French prime ministers are underway, but no decisions have been made about whether Greece will receive its next tranche of bailout funds. In part, this decision will depend on the European troika’s onsite visits scheduled for next month. Not surprising is the revelation that Greece seeks additional forbearance from its benefactors, this time in the form of delays in meeting deficit targets. While Greece does not appear to be seeking any new monies beyond the aid package already agreed upon, German leaders are fed up with Greek attempts to move the goalposts. If the next installment of cash isn’t released by October, Greece will run out of money.
Next week, the cadence of economic reports picks up and investors will turn their attention to Jackson Hole, Wyoming, where Fed Chairman Bernanke will pontificate about the economy and the Fed’s role in support of its full employment mandate.
Our Takeaway from the Week
- Stocks are testing yearly highs despite mixed economic reports domestically and expectations for additional monetary stimulus both here and abroad