The economy remains sluggish as the Fed remains on the sidelines. Investors are bracing for what could be a very disappointing earnings season. Sluggish growth has investors hoping for a lifeline from the Fed, but the latest minutes from the Fed offered few concrete signs that a new burst of liquidity might be forthcoming. That’s not a recipe for an upbeat equity market.
Europe is continues to haunt the markets with Spain the major point of concern as they are drowning in debt.
That’s really weak!
In the U.S. this week we saw a whole slew of weak preannouncements including:
• Advanced Micro Devices (AMD) reduced its Q2 revenue forecast, noting softer-than-expected sales in China and Europe as well as a weaker consumer buying environment.
• Applied Materials (AMAT) cut its 2012 business outlook due to weaker-than-expected near- term demand in its semiconductor equipment business.
• Negative EPS preannouncements from S&P 500 firms. Negative EPS announcements have topped positive preannouncements by a ratio of 3.6—the weakest since Q3 2001.
Where are the jobs?
The Fed announced this week that job growth is its top priority. Nonfarm payroll growth fell below 100K for three straight months. With so much uncertainty heading into the fall elections and the fiscal cliff of 2013 on the horizon, companies are not in a hiring mood.
Could we see Fed action on the way?
Ben Bernanke last month said, “We’ll continue to monitor the economy and see how things evolve. And if—again, we’re looking primarily at the labor market in this respect—if we’re not seeing a sustained improvement in the labor market, that would require additional action.” Three straight months of job creation shy of 100,000 would seem to fit the Fed chief’s requirement for more action. Stocks didn’t receive much encouragement form the Fed this week with a lack of clarity in the Fed minutes. With no concrete signs of QE3 ahead, stocks were stuck in the mud!
The Mighty Shrinking Trade Gap…It’s only an illusion!
The trade gap shrunk from $50.6 billion in April to $48.7 billion in May as exports increased and imports decreased. However, keep in mind, exports are still in a downward trend as overseas weakness persists. Export and manufacturing growth are two areas that have been bright spots in an overall sluggish recovery but they both continue to slow. New sectors need to kick up the growth in order to fill in the gap.
Small Business Blues
Small-business optimism receded to its lowest level since October of 2011. NFIB Small Business Optimism Index fell 3 points to 91.4. Labor market indicators, spending plans for capital equipment, and inventories took a beating, accounting for about 40% of the decline. As confidence continues to dwindle, hiring slows.
Another Illusion? Four-year Low in Weekly Jobless Claims
Weekly jobless claims dropped 26,000 to 350,000. Is this truly an improvement in the job market? It’s very doubtful! Strong auto demand may be reducing the layoffs and the timing of temporary shutdowns can prevent capturing seasonal effects. The 4th of July Holiday last week may have also distorted the data.
Danger in Spain
The June EU summit optimism has quickly faded with the Spanish 10-year bond briefly jumping above 7% (a dangerous level). EU talk that direct loans to banks would have to be guaranteed by the government hurt confidence. As EU plan details get rolled out, sentiment seems to retreat. The announcement of new austerity measures designed to meet deficit targets pushed yields lower, for the moment. Patchwork repairs in Europe have helped investor optimism for a week or two, but fixing sovereign debt issues and weak economic growth must be addressed in order to settle investor nerves.
Euro Hits Two-Year Low
The Euro was below $1.22 this week after the ECB’s rate cut last week and talk of more cuts. This has lead to less demand for the Euro. As the Euro gets weaker, the dollar continues to gain strength which will provide a headwind for earnings at multinational firms.
At Faith-Based Investor we continue to seek out quality dividend paying companies paying at least a 3 to 4% dividend to outpace inflation. We continue to look for opportunities in our favorite defensive sectors – telecom, utilities, health care, and consumer staples. It’s better to be safe than sorry right now!
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