Weekly Recap

The market started the week optimistic about the outlook for second quarter earnings reports. The week ended on a dismal note, with concerns about war in the Middle East and oil prices dominating the action.

The S&P 500 index gained 2 points on Monday. That reflected a decent underlying tone. Merrill Lynch downgraded the technology sector to "underweight" and that led to a 13 point drop in the Nasdaq. The critically important technology sector continues to be the weakest of the ten S&P categories, but the overall S&P held steady.

On Tuesday, the S&P 500 index gained another 5 points. Alcoa reported decent earnings and the general tone was moderately bullish. The Nasdaq even snapped back 11 points. Then, the roof caved in.

Wednesday the market tanked. The S&P lost 14 points and the Nasdaq 38. Semiconductor stocks got slammed and a number of analysts cut earnings estimates for key companies such as IBM, Dell, and Apple for the second half of the year.

Also of concern were increased tensions in the Middle East which pushed oil prices towards $75 a barrel.

The tensions were soon labeled "war" and the S&P plunged another 16 points on Thursday. Oil prices rose towards $77 a barrel. Analysts didn't help, as Wal-Mart and Walt Disney received notable downgrades. There was no sign of a bounce.

It didn't get any better on Friday, as the S&P dropped significantly again. The war and oil prices were a primary factor, but there was also no good news to reverse the selling. Oil prices rose above $78 during the day, and fears of a significant consumer slowdown were exacerbated by a drop in June retail sales of 0.1%.

It was supposed to be the week that got earnings season off to a start, but war concerns and lowered expectations for second half earnings trumped the few reports that came out.

The earnings reports that did come out were decent. Alcoa, Pepsi Bottling, Genentech, Gannett, M&T Bank, Marriott, and PepsiCo all beat estimates. General Electric reported in line with forecasts. But it wasn't close to enough to boost market sentiment. Any company that gave even a hint of lowered expectations for upcoming quarters, or missed revenue estimates on a key product line, saw their stock price get slammed.

There was no help from the few economic releases. The May trade balance was a bit lower than expected, but initial claims for unemployment were up, and retail sales were down a bit. These weren't key numbers, but they did nothing to alleviate concerns that economic growth is hitting the wall.

The week thus ended on a very sour note. Earnings reports start in earnest next week, but the key driver may be developments in the Middle East. These are impossible to quantify, and the fears associated with the war are a leading cause of the current market malaise.

Oil prices are rising again at a time when consumer spending is already slowing down. It may no longer be a question of whether the Fed raises rates further; it may be a matter of just how significant is the economic slowdown. Most economists continue to forecast 2% to 3% real GDP growth in the second half of the year, but there are fears of weaker growth.

Another problem is that earnings estimates for the coming quarters are finally coming down. Just a few weeks ago, estimates were for 12% growth over the second half of the year. Those were way too high given that economic growth is slowing. Now, the market has to adjust to an uncertain degree of lower earnings growth.

The market is likely to face further volatility in the weeks ahead.

-- Briefing.com