Recap of the Previous Week: Slip Sliding Away
By Joseph Hargett, Senior Equities Analyst
(http://www.schaeffersresearch.com/commentary/observations.aspx?ID=101693)
The D word -- as in double-dip -- began as a whisper and turned into a full-throated roar last week. Fears that the U.S. economy would slip back into recession grew with every successive economic report. Employment remains weak. Growth prospects are dimming around the globe. Manufacturing was weaker than expected in both Japan and China, and the Bank of England cut its outlook for the British economy. Everyone from Goldman Sachs to the Federal Reserve agreed that economic recovery is progressing more slowly than expected. The Dow Jones Industrial Average reacted by slumping back below its June highs, reversing the gains of late July and early August.
At least the week started off on an entertaining note, as traders considered the surprise Friday resignation of Hewlett-Packard Co. (HPQ) CEO Mark Hurd, following a sexual-harassment claim. As details unfolded -- did they? didn't they? -- Hurd critics and defenders laid out their cases. Meanwhile, back on Wall Street, Goldman Sachs cut its year-end target for the S&P 500 Index (SPX) from 1,250 to 1,200. Nonetheless, the Dow recorded a solid 0.42% gain for the day.
The Dow sank at the open on Tuesday, dropping 150 points, thanks to disappointing reports on U.S. productivity and Chinese imports. But the big news of the day came from the Federal Open Market Committee (FOMC). The Fed committee reported that economic recovery is progressing, albeit very slowly. It also reiterated the Fed's longstanding pledge to keep interest rates at record-low levels for an extended period and announced plans to invest in longer-term U.S. Treasurys. The Dow pared most of it losses by the end of the day -- dropping 0.51% -- but a gloomy tone had been established.
Wednesday's sell-off began overseas, and financial terminals around the world displayed a sea of red. Both China and Japan released data revealing a slowdown in manufacturing activity, and the Bank of England forecast slower growth for Great Britain -- echoing the Fed's statement of a day earlier. Meanwhile, here in the U.S., the trade deficit unexpectedly widened in June. The Dow tumbled out of the gate and drifted lower throughout the day, finally settling near the session's lows. When the dust cleared, the Dow dropped 265 points, or 2.49%, and slipped below the support of its 200-day moving average.
Any hopes for a Thursday bounce were probably dashed Wednesday night when blue-chip tech titan Cisco Systems (CSCO) confessed to weaker-than-anticipated revenue. CSCO also tempered its outlook for the next quarter and year; CEO John Chambers told analysts that the company is seeing "mixed signals" and an "unusual uncertainty" from customers. Then, to seal the bearish deal, the Labor Department announced a surprise increase in first-time jobless claims. The Dow dropped another 0.57%.
On Friday, inflation hawk Thomas Hoenig, the president of the Kansas City Fed, delivered a major speech in which he criticized near-zero interest rates as "a dangerous gamble." Hoenig has long been dissenting from the Fed's pledge to keep interest rates near zero for an "extended period." Elsewhere, July retail sales inched up 0.4%, and the Reuters/University of Michigan consumer confidence index climbed to 69.6 in August, surpassing expectations. The Dow settled for a slim loss of 0.16%. The Dow ended the week 3.3% lower, while its major market brethren fared even worse. The SPX lost 3.8% for the week, while Nasdaq Composite dropped an ouch-worthy 5%. All three major market indexes are below breakeven for the year.
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