Morning Comment - August 17, 2010
Stocks closed mixed yesterday, but with a slight bias to the upside. Overall, the Dow Jones Industrial Average dipped a scant one point, marking, at least on a technical basis, that 30-stock composite's fifth losing session in a row. However, the NASDAQ rose modestly, as did the small-cap Russell 2000 Index, while the Standard and Poor's 500 index was flat, gaining about a tenth of a point. There was clearly no follow through after last week's rout. Yesterday, meantime, was the slowest trading day of the year.
As for the market, there remains no clear direction, with equities essentially locked in a trading range around 10,500 on the Dow. The main positive in recent weeks has been the generally upbeat performance out of Corporate America during the second quarter and the reasonably good outlook for the current period, notwithstanding the recent slowdown in the economy. The principal negative remains the economy, which is weakening notably and in danger of possibly falling into a double-dip recession. We think the odds of such an unwelcome event remains about one in three.
Meanwhile, although there is little conviction on the equity front, there is no shortage of decision-making on the bond side, where yields continue to decline, in a general loss of confidence in the economy. For example, the benchmark 10-year Treasury note continues to strengthen, with its yield, which moves in the opposite direction of the price, falling in the latest session to 2.58%. The yield has climbed a touch, to 2.60%, this morning. Yields on the companion 30-year bond are down to 3.72%. At these levels, there would not seem to be much competition for stocks, but equities are still not being helped by the low yields, apparently because investors fear the worst on the business front. And, they are suitably skittish with respect to corporate earnings down the road.
As for the economy, the news abroad remains bleak, with dour economic news out of Japan right off the bat yesterday morning, as that island nation saw its growth fall well short of expectations during the second quarter, with its GDP rising by the smallest of margins. In fact, based on that showing, Japan's economy has slipped behind emerging giant China, which is now the second largest global economy, a remarkable achievement given that the latter is still in the developing phase. Closer to home, the National Association of Home Builders saw its confidence index slide to its lowest level in nearly a year and a half.
Still, even with this unwelcome news backdrop, the equity futures are showing some positive action this morning, with the S&P futures up about six points and the NASDAQ futures climbing by close to eight points. Thus, with bargain hunting apparently in vogue again, a buoyant opening for the market would seem to lie ahead.