Volatile Week in the Market

Stocks underwent severe volatility last week. We had four days in a row of 400-point swings for the first time in history and markets moved over 4% on each of those days, marking only the fifth time in the last century that occurred in a single week. After all was said and done for the week, the Dow dropped 1.5% to 11,269, the S&P 500 Index fell 1.7% to 1,179 and the Nasdaq Composite declined 1.0% to 2,508.

Biggest concerns: S&P’s downgrade of US Treasuries, the US Political Crisis and the ongoing sovereign debt crisis in Europe. We’ll continue to focus on the things we can control – You can’t Predict, but you can Plan for the Future.

Bob Doll’s commentary this week has the positives outweighing the negatives (click HERE for full article):

• The broad concerns about the health of the global economy are clearly understandable given that in many parts of the world fiscal stimulus has been largely exhausted and monetary policy rates are already at or near zero.
• Given this backdrop, many investors are deeply fearful of the possibility that declining markets could exacerbate an already-weak economy via a further weakening in confidence.
• The Fed indicated that it planned to keep the Fed Funds target rate at its current level of between 0% and 0.25% through at least mid-2013. This statement represents a dramatic change in the Fed’s stance and is the first time that it announced a specific future time frame for interest rate decisions.
• Initial jobless claims for the week ended August 6 fell to below 400,000 for the first time since April, a trend that reinforces our view that the softness in the labor market continues to slowly fade.
• Retail sales for June were revised higher and July’s retail sales figures also increased.
• Doll believes foundations in place for the global economy to keep the recovery on track, but economic growth will likely continue to be anemic.
• For the United States, there is serious work to be done to repair the country’s balance sheet. The United States has experienced a significant deterioration in finances since the late 1990s when the budget was last in surplus. There is a great deal of ongoing debate in Washington over these issues, but it looks like any real progress will have to wait until after the 2012 elections.
• In terms of Europe’s debt issues, a comprehensive pan-European solution is needed rather than just the temporary Band-Aid approaches taken so far. Some initial progress has been made on this front, but more is needed. All of this suggests that debt issues will remain a concern for some time.

Summary view:

• Investors are overly pessimistic about the possibility of a renewed recession in the United States. It is important to remember that equity markets have a poor track record as acting as predictors of recessions and corporate fundamentals remain strong.
• Since 1950, the United States has never entered a recession with corporate balance sheets as flush with cash as they currently are — at present, nonfinancial companies are holding cash in the amount of around 11% of their balance sheets, the highest level in over 60 years.
• From an earnings perspective, results have also been very strong. Second-quarter results show that earnings have grown over 18% on a year-over-year basis driven by a nearly 10% rise in revenues.
• Corporate earnings are all but certain to surpass their mid-2007 highs before the end of this year, and yet stocks remain about 35% below where they were at that time.
• This backdrop underscores how inexpensive stocks are at present. This is not to say that we expect a rapid price rebound since markets are likely to continue to be driven by near-term economic and debt issues, but it does suggest that the long-term outlook for equities remains positive.