Permanent Value

Weekly Update: July 26- 30, 2010

Michael La Salle
July 30th, 2010

Stocks Unchanged as Stocks Finish Best Month in a Year

Stocks ended the week mostly unchanged as the S&P 500 lost 0.1% and the Dow Jones Industrial Average gained 0.4% on the week.  July became the best performing month in over a year with the S&P 500 and the Dow Jones Industrial Average both rising nearly 7% for the month.

In economic news, consumer confidence dipped again in July over worries of the jobs picture as the Conference Board announced the consumer confidence index fell to 50.4 in July from the 54.3 reading in June.  Durable goods orders also disappointed in June as the new orders slipped 1% month over month, estimates were set at a 1% boost.  The big news came on Friday as second quarter GDP came in at an annualized 2.4% growth.  Estimates were set at a 2.5% quarter over quarter annualized growth.

In earnings news, Aetna Inc. beat analysts’ estimates of 74 cents per share by posting earnings of $1.05 per share.  Lockheed Martin Corporation also beat expectations this week as the Maryland-based global security company reported earnings of $1.96 per share, 10.11% higher than analysts’ expectations of $1.78 per share.  Las Vegas Sands Corporation beat analysts’ expectations by 88.89% after posting earnings of 17 cents per share; estimates were set at 9 cents per share.  About 75% of the roughly 300 companies in the S&P 500 that have reported earnings so far have beat expectations.

What opportunities are ahead?

Friday’s gross domestic product number missed expectations with a 2.4% annualized expansion rate, showing U.S. economic growth slowed for the second quarter of 2010.  Although these numbers prove economic growth has been a little tepid, the importance of the GDP number lies in the fact that this is the fourth straight quarter of growth for the U.S. economy since the end of our most recent recession.

 When looking at GDP and its effect on the investments investors choose, it is important to understand the different stages in an economic cycle.  The four major stages of an economic cycle include:  slowdown, recession, recovery, and expansion.  Each of these four also includes their own phase including early, middle, and late stages.

As investors, we need to be able to identify which sectors are the best to invest in each phase of the economic cycle.  Taking into consideration that we have had four straight quarters of economic growth, it is safe to say that we are in the economic recovery stage of the cycle.

Since most economies are driven by consumer demand, this is where most of the economic growth will come from during the recovery stage.  The consumer discretionary and the retail sectors are historically both places where investors see growth during this stage of the cycle.

Thinking towards the future, we must also be able to identify what investments tend to outperform in the next stage of the cycle, economic expansion.  During the expansion phase, GDP has started to grow at a robust pace, of approximately 4-6% quarterly growth.  In this stage, companies see a recovery in their revenues and profits.  This sparks investment in large infrastructure projects and longer-term assets like machinery, computers and other capital goods.  In this phase of the cycle investors tend to see growth in the industrials, materials, and semi-conductors sectors.

Having an understanding of where an economy is at any given time can be a great way for investors to have a better idea of where there investments should be.  Although the length of each cycle and the length of each stage of the cycle vary, using certain economic indicators, such as GDP, can be a way that investors can identify certain sectors to look deeper into when choosing an investment.

Market Returns

  This Week Year to Date Last Year Last 5 Years
S&P 500 -0.1% -1.21% 11.64% -10.74%
Dow Jones Industrial Average 0.4% 0.36% 14.33% -1.64%


Next Week’s Economic Releases

August 2 – ISM Manufacturing Index

August 3 – Personal Income and Outlays, Pending Home Sales

August 6 – Employment Situation