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Declining Consumer Confidence Hits Stocks - Week Ended 7/16/10
posted 07.19.2010 at 09:43 a.m. by steve
After extending their winning streak to 7 straight days, US equities proceeded to hit a wall of resistance late in the week and ended lower than where they began. The S&P finished the week down -1.21% following a massive decline on Friday of -2.88% onset by a consumer confidence number that plunged in the last month.
Ultimately, negative economic releases late-week overshadowed what was a great start to 2Q earnings season. Notable was great earnings from Alcoa (aluminum producer), CSX (railroad) and Intel (tech) which all showed better than expected gains in earnings and revenues and their outlook comments for the second half of 2010 remains bright and optimistic despite what has felt like a soft patch for the economy over the prior couple months. As has been the case for the past 2 years, the banking sector continues to show evidence of struggle. JPMorgan, arguably the healthiest big bank, reported better than expected earnings, but reduced the amount it sets aside for bad loans; Citicorp, by contrast one of the weakest big banking institutions, reported earnings that met analyst expectations but did so by setting aside a significantly smaller amount for bad loans than in previous quarters. The accounting profits cause one to question how strong the sector is recovering, and if banks are recognizing lower loan losses in order to juice earnings to meet expectations. Meanwhile Bank of America, the largest financial institution by deposits, missed revenue estimates adding to anxiety over the sector.
Also reported last week was an improvement in new unemployment claims, which fell to their lowest reported level in two years. But, one week does not make a trend, and investors will be watching the series in this and upcoming weeks to see if better numbers can be sustained. But, while employment numbers improved, manufacturing related data that had been the brightest spot of the recovery, deteriorated. This week, earnings season continues against a backdrop of just a few new economic data points, many of which are likely to be soft given that they are generally housing-related. Following expiration of the homebuyer tax credit in April, data from the housing sector is likely to be weak for several months as demand was pulled forward.