What a Week: Upbeat Finish
Aaron Task
05/11/07 - 06:04 PM EDT
Those viewing the financial markets as cold, calculating and rational ought to consider this week as "Exhibit" A to the contrary.
After starting cautiously optimistic, the market's mood swung from confusion to excitement to fear, before ending with renewed hope on Friday. Weekly tallies reflect the market's emotional conflicts, with the
Dow Jones Industrial Average up 0.5%, a sixth-straight weekly rise salvaged by Friday's rebound. The
S&P 500 rose a fraction for the week while the
Nasdaq Composite shed 0.4%, its first weekly drop since late March.
Wednesday's
Federal Open Market Committee meeting was the week's literal and figurative crux. The Fed's decision to keep unchanged both rates and its formal tightening bias was initially greeted with mild disappointment. But traders took some solace in the Fed's forecast. "[T]he economy seems likely to expand at a moderate pace over coming quarters," the central bank said in its post-meeting statement, though it also conceded "economic growth slowed in the first part of this year."
Amid hopes for the so-called soft landing and merger speculation about
Rio Tinto (RTP) and
OfficeMax (OMX), the major averages hit their best levels of the week on Wednesday. The Dow's close of 13,362.87 was its fifth-straight record and the 21st of 2007. Previously, the Dow was aided by
Alcoa's (AA) $27 billion bid for
Alcan (AL) on Monday, and
Hewlett-Packard's (HPQ) raised guidance on Tuesday.
Meanwhile, the S&P 500 finished Wednesday less than 1% from its March 2000 all-time closing high of 1527.46. The Philadelphia Stock Exchange Semiconductor Index also hit a 52-week high Wednesday in the wake of positive comments by
Texas Instruments (TXN), which boosted the chip sector generally. But the Nasdaq was restrained by a sell-the-news reaction to
Cisco's (CSCO) earnings and
Dendreon's (DNDN) pummeling, after the Food & Drug Administration requested more clinical data on the company's prostate cancer drug, Provenge.
Thoughts of records and soft landings evaporated Thursday, as the major averages suffered their biggest declines since mid-March, the Dow losing 150 points. Major averages were hurt by weakness in energy stocks, profit-taking in names like Alcoa, as well as declines in
Amgen (AMGN) and
Johnson & Johnson (JNJ) after the FDA voted for more restrictions and clinical trials for anemia drugs.
Thursday's headlines were dominated by weak April same-store sales data from retailers such as
Wal-Mart (WMT) and
Federated (FD). Along with a profit shortfall from
Whole Foods (WFMI), the sales reports revived concerns about the consumer's health amid the housing market's ongoing weakness and high gasoline prices. Additionally, a wider-than-expected March trade deficit report suggests first-quarter GDP will be revised down to less-than 1% from an already tepid preliminary report of 1.3%.
"People are probably going to become even more concerned as second-quarter data is released," Jane Caron, chief economic strategist at Dwight Asset Management, a Vermont-based firm with over $60 billion in assets, said on Thursday's
"The Real Story" podcast. "We saw weak chain store sales data for April [which] points to real consumption growth really quite slow. We're looking at a fairly weak economic environment."
The Commerce Department's weak April retail sales report Friday, along with a profit warning from
Foot Locker (FL), added to anxiety about consumer spending. In addition, former Fed Chairman Alan Greenspan told a business seminar there's a one-third chance the U.S. economy would slip into recession this year,
Reuters reported.
Yet major averages rallied Friday, as the combination of weak retail sales and mild core PPI calmed fears the Fed might need to raise rates, and raised hopes for a rate cut before year-end.
On Friday, the Dow rose 0.8% to 13,326.22, while the Nasdaq gained 1.1% to 2562.55 and the S&P climbed 1% to 1505.85. The comeback was led by energy giants like
ExxonMobil (XOM) and chip stocks such as
Nvidia (NVDA).
Caron believes the Fed was right to keep rates unchanged and maintain its tightening bias, or a view that inflation remains a greater risk than a slowdown.
"I don't think things are bad enough to warrant easing at this time," she said. "The other reason the Fed is right to keep policy unchanged is because one of the most important things for the Fed is to maintain its inflation-fighting credibility. They've drawn a line in the sand and said 1% to 2% is the comfort zone for core PCE and it's still running above [that level].
The Fed may ease this summer if there's "more definitive softness in economic growth," Caron adds. But right now the best strategy is to "keep policy on hold unless we see more definitive softness or the economy sustains a shock."
Amid all the angst, the Economic Cycle Research Institute said Friday its Weekly Leading Index increased for the week ended May 4 and now sits at a three-year
high on an annualized basis.
"I believe this is still a Goldilocks economy -- only, this Goldilocks has a couple of blemishes, which has made some mistake her for a bear," Anirvan Banerji, director of research for ECRI, commented on
RealMoney.com's "Columnist Conversation. "There may be some further fallout from the housing downturn, but I don't believe it will trigger a recession in the foreseeable future. Bottom line, despite pockets of weakness, recession risks remain remote, while inflation pressures are still in an easing trend."
Nevertheless, Banerji's optimism puts him in the minority as
skepticism remains high about the economy and the market.
"We're obviously exiting the earnings period and the focus is shifting to the economy and the Fed," Teddy Weisberg, president of Seaport Securities, said Friday in an
interview on TheStreet.com TV. "The Fed appears in bit of a box. They're clearly concerned about inflation but all the evidence indicates the economy is slowing. There's not a lot of positive things going on out there. That probably is not going to be the same impetus for as strong a market as we've seen for last three or four weeks."
That said, the "buy the dip" strategy remains a winner until proven otherwise, Weisberg said in the midst of Friday's rebound. "If it's not broke, don't try to fix it."
Indeed, the underlying tone heading into the weekend was back to cautious optimism: Either the economy rebounds or the Fed will ease.
Heads bulls win, tails bears lose.
