Weekly Recap

Underlying anxieties continued to haunt stocks this past week, as the market was driven by emotions rather than any change in the fundamentals. One day the market sold off sharply on little news. Another day it shot up with equally little rationale. At least next week there will be some truly important news to which the market can react.

On Monday, the S&P 500 index dropped 11 points. Fed President Guynn made some comments about the core rate of inflation being in an unacceptable range. The comment hurt the stock market, but he didn't say anything new. On Tuesday, the market was flat.

Wednesday, the S&P surged 12 points. The move was largely ascribed to good earnings reports from Morgan Stanley and FedEx. But there were also good earnings reports on Monday when the market sold off. In fact, the move simply reflected some latent demand bursting through after the market stabilized a bit.

Thursday the S&P sold off 7 points. It was largely a reaction to the big gain on Wednesday. Friday the market was flat.

There was very little corporate or economic news over the week. The corporate news was mostly good. Target said June same store sales were running near the upper end of their 3% to 5% forecast. Caterpillar said dealer sales remain strong. CarMax, Circuit City, Apollo Group, Kroger, Darden Restaurants, A.G. Edwards, and Oracle all had good earnings reports. There were a couple of earnings warnings, but the outlook for the second quarter earnings reports that will come in July is upbeat.

There was also little economic news, and it was mixed. May housing starts (surprisingly) rose, but that was after a larger April drop. New claims for unemployment stayed at low levels that suggest June payrolls will advance more than the modest 75,000 gain posted in April. May durable goods new orders were a bit softer than expected, but only because of a drop in the volatile aircraft component. There were no strong conclusions to draw from this array of data other than that a general economic slowdown is occurring.

Last week we said "until the market gets a clearer sense of the outlook for inflation and Fed policy, the prospects for a summer rally seem remote." That is still the case, but at least the market will get some data on these fronts next week.

The Fed policy announcement is due on Thursday. Another rate hike is considered certain, but the market will once again be looking for direction on any future rate hikes. Another statement about policy being dependent on incoming data probably won't help. Then on Friday, the personal consumption data will be released. That includes the core PCE deflator, which is an inflation measure the Fed closely watches. It is not as sensitive to housing costs as is the CPI, so a 0.2%, or even 0.1% is possible. That could help ease the worst of inflation fears.

In any case, the inflation and Fed policy anxieties are not likely to go away soon, as the backup in the 10-year note yield to 5.22% from 5.09% last week attests. The market will be subject to continued volatility. With technology and small cap stocks floundering the most, there is no sense of urgency amongst investors. The second quarter earnings reports staring in mid-May could provide the best opportunity for the focus to shift to some of the more positive fundamentals.