Signs of positive U.S. economic growth and compromise in Europe over ECB bond purchases drove domestic stocks to a fourth straight weekly gain. Chancellor Angela Merkel said Germany and the ECB are “aligned” on their view that central bank bond purchases should be conditional on fiscal reform in those countries needing support. The comments were viewed as a step toward greater ECB involvement in the resolution of the European debt crisis. Treasuries fell as investors moved to riskier assets. Gold was little-changed and oil rose.
S&P 500: 1,418 (+0.9%)
MSCI EAFE: (+0.8%)
U.S. 10-Year Treasury Yield: 1.81% (+0.15%)
Gold: $1,616 (-0.2%)
USD/EUR: $1.233 (+0.3%)
- Monday – Groupon reported lower-than-expected sales and earnings. Shares fell in after-hours trading and lost over a third of their value during the week.
- Tuesday – U.S. consumer spending increased 0.8 percent in July, the first increase in four months.
- Tuesday – Economic activity in the Eurozone declined 0.7 percent in the second quarter, with growth in Germany slowing to 1.1 percent.
- Wednesday – Cisco reported a 56 percent increase in quarterly earnings and announced a dividend increase. Shares rose over 8 percent during the week.
- Wednesday – U.S. consumer prices were unchanged in July, allowing the Fed to be less concerned with immediate inflation.
- Thursday – Facebook shares declined 6 percent as some early investors became eligible to sell shares. The stock fell 12 percent for the week, and is now valued at roughly half the initial IPO price.
- Thursday – German Chancellor Angela Merkel said the country remains committed to do everything it can to preserve the Euro and suggested she may be more open to ECB bond purchases if they came with new fiscal requirements.
- Friday – Apple shares hit a new high on optimism about future sales of a new, smaller iPad and television product.
- Friday – The Treasury Department announced changes to its bailout agreement with Freddie Mac and Fannie Mae that will shrink their holdings more quickly and require payment of all earnings to the government.
Want to take a quick guess what the year-to-date return for the S&P 500 is?
How does 14.3 percent sound?
Stocks are quietly having a very nice year. The pattern has been a steady rise when European news flow is minimal, followed by knee-jerk corrections when the debt crisis flares up. With much of Europe on vacation the past month or so, markets have plowed steadily higher.
Things will get more interesting soon as Greece is forced back under the microscope. The situation isn’t pretty, but on a broader level there are signs of progress. So far in the crisis, there has been a lot of talk and only moderate action. Therefore, we remain wary of off-the-cuff commentary and political rhetoric. But Merkel’s prepared statement of “alignment” with the ECB on bond purchasing is a new development and potentially a huge step forward.
Bull markets tend to silently advance in times of fear. There is legitimate reason to be wary of stocks, but we note that many individual investors are taking a big bet against equities by holding lots of cash and bonds. So far this year it has been a costly strategy. For those who have been hesitant to move forward positioned in their optimal long term asset allocation, now may be the time to act.
Image used under Creative Commons by Flickr user dullhunk.