The Relief Rally That Wasn’t

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Just when all the market pundits were expecting a big relief rally after the passage of the new budget-ceiling package, equities dropped off a cliff, and sent most of the major stock indexes into ‘correction’ mode. It just wasn’t the long drawn out wrangling that went on in Washington over the debt ceiling that caused the drop, but a string of weaker than anticipated economic reports and the shifting of sovereign debt concerns from Italy to Spain that brought on the real ‘house of pain.’ And then just when you thought it was safe to glide into the weekend, Standard & Poor’s removed for the first time the triple-A rating the U.S. has held for over 70 years after the markets had closed this past Friday. S&P apparently felt that the recently brokered budge deal in Washington wasn’t going to do enough to address the gloomy long-term picture for America’s finances. The move from AAA to AA+ also reflected the agency’s growing concern over our high level of federal debt.

Last week was definitely five days that investors would just as soon forget. When the dust finally settled on the horrendous week, the Dow Jones Industrial Average was down by 5.75 percent; the Standard & Poor’s 500, down 7.79 percent; the Nasdaq Composite, down 8.13 percent; and the Russell 2000 index of smaller-cap stocks, down an amazing 10.34 percent. When all was said and done, it was the worst weekly equity decline since November 2008.

On a year-to-date basis, the major indexes are not surprisingly all to the negative. The Dow is down 1.1 percent; the S&P 500, down 4.6 percent; the Nasdaq, down 4.5 percent; and the Russell 2000, down 8.8 percent. Hard to believe that in just five short trading days, some of the indexes are now officially in ‘correction’ mode. And to make matters worse, many investors still think that stocks still have further to fall with all this talk of another recession hanging over the markets. Investors are already looking to the upcoming Federal Reserve meeting to see whether it will take more steps to mend what appears to be a weakening economy. Unfortunately the current pessimism lingering in the marketplace may continue in the near term, especially with the above-mentioned downgrade of our nation’s credit rating.

Treasury securities continued to post strong gains last week, with the benchmark 10-year price notching its biggest weekly gain since August 2009. The benchmark 10-year note is currently yielding 2.554%, thanks in part to last Friday’s stronger-than-expected employment report. However, many experts are now predicting that the yield could fall below 2% believe it or not, if the present risk aversion intensifies. Even the 30-year bond is only yielding 3.820%, as investors are forced to seek extra returns in these longest maturities. However, keep in mind that yields could go higher should we get any stability in the marketplace, and right now what we’re witnessing is just speculation based on uncertainty. Right now our view is that the financial markets will be more sensitive to the ongoing events in Europe, and specifically both Italy and Spain, than the S&P’s downgrade on the U.S.

After such a volatile week in the markets, the next five trading sessions look rather quiet on the economic front. One thing investors will be keeping their eye on is the Federal Open Market Committee minutes on Tuesdays. The results of this meeting usually cause increased volatility in the markets. On the back of sovereign debt issues in both Italy and Spain, the European Central Bank is set to reveal their monthly report this Thursday which can also lead to wild swings in the international markets. As to earnings, it’ll be a big week for the retailers as Ralph Lauren, Macy’s, Nordstrom and J.C. Penney’s are just a few of the more notables to be reporting their 2nd quarter numbers.

On a brighter note this past week; it appears that Apple Computer is fast closing in on bypassing Exxon Mobil, the energy company, as the most valuable corporation in terms of market capitalization. Currently Apple is only $16 billion shy of passing Exxon Mobil, which is a drastic change from two weeks ago, when Apple was $50 billion shy of being crowned with the title of the world’s most valuable company. It’s probably just a matter of time before Apple overtakes Exxon Mobil given the massive momentum behind Steven Job’s juggernaut.

While the present market volatility is certainly causing much investor angst, keep in mind that the markets are just going through another so-called ‘cycle’ in our economic times. If you’re beginning to feel anxious or concerned about the markets, we have just one word for you: DON’T! That is why you have hired Money Management Services, Inc. to manage these types of situations for you. As the old Greyhound tagline used to proclaim, “Leave the driving to us.”

Until next week, take care!!

Sources:Barron’s, Wall Street Journal, Associated Press, Econoday, Gorilla Trading, Dow Jones & Company, Briefing.com

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