Weekly Recap

It was a terrible week for the stock market. The negative tone was set right from the start and carried throughout the week.

On Monday afternoon, Federal Reserve Chairman Bernanke made comments at an American Bankers Association conference that caused deep concern for stock investors. He said that core rates of inflation had risen to levels that were at or above the upper end of ranges consistent with price stability. He said that due to such "unwelcome developments" the Fed must work to keep inflation and inflation expectations in check.

The market took this to mean that a further rate hike at the June 29 meeting is now likely. The probability of a hike, as measured in the fed funds rate futures market, went from about 45% to 75%. Perhaps even more importantly, Bernanke's tough tone on fighting inflation raised concerns that the Fed would be willing to accept significantly slower economic growth in order to fight inflation now. There was no sense of moderation or patience in his comments.

That single event determined the action for the rest of the week. The S&P 500 was down 5 points on Monday when Bernanke started speaking, and ended down 23 points on the day. The rest of the week was about chart watching as the market became extremely volatile while searching for a bottom. Repeated efforts at rallies failed.

Tuesday the market opened higher, but soon gave way to heavy selling. A late rally pared the day's loss to 1 point in the S&P. That raised hopes that Wednesday might bring stability.
In fact, the same pattern developed. An up open was followed by a quick sell-off, then a rally, only to suffer from a plunge at the close. The S&P lost 8 points that day.

Thursday the market was extremely volatile. The S&P was down 21 points at noon, but a late rally actually pushed the S&P to a 2 point gain. Again, hopes were high that this signaled a bottom forming.

Friday, the market did post modest gains in the morning, but another late sell-off led to a loss of almost 6 points for the S&P 500 index. Once again, action was very volatile on little news. The week was dominated by discussion as to just how far stocks were likely to go before forming a bottom.

There were no economic releases or earnings reports of note this past week. Corporate news was very light, although Texas Instruments, Novellus, Procter & Gamble, and Hewlett-Packard gave upbeat outlooks for the current quarter.

The 10-year note yield held at 4.98% from 4.99% last week. Oil closed little changed on the week at $72 a barrel. Even the ongoing saga with Iran and the death of Zarqawi in Iraq had little impact on the overall market.

The focus is now on the highly important core CPI data due Wednesday, and to a lesser extent on the core PPI data on Tuesday. The stock market remains extremely anxious about how much further the Fed will have to raise rates to fight inflation, and to what degree that will hurt economic growth. The high level of pessimism seen this week may not persist, but the volatility is likely to continue.

-- Briefing.com