It was a tough week for stocks, with the averages posting their biggest loss in a year on uncertainty out of Washington. For the week, the Dow fell 4.2%, putting July on pace for the market’s third consecutive losing month.
We all knew the debt ceiling was going to be a dog fight, but here we are, just 2 days away from what everyone considers D-day (Aug2/technical default), and we still have no resolution. And it’s causing big problems for the market, where everyone from your grandmother to the hedge-fund manager down the Street is trying to figure out how to price risk.
Keep in mind, every asset in the world is priced off of what is called the “risk free rate,” with the risk-free rate being America’s cost of borrowing. The United States for a long time has been considered the most financially sound and secure institution in the world. So any small fluctuation in that benchmark has a serious affect on how the market views every single asset under the sun.
Longer term, we know the United States has some serious financial problems to deal with. But in the short run, even a small amount of clarity on the issue would do a lot to restore confidence.
GDP a bit Weak
The other thing that clipped the market this week was a weak read on Q2 GDP, coming in short of expectations and below normal post recovery growth. Even though that isn’t going to make anyone stand up and cheer, here’s something to consider.
Everybody already knows the economy is weak. Unemployment is high, inflation is low and interest rates barely exist. But what we have seen over the last two years that is unique is a decoupling between “the economy” and the stock market.
That’s because corporate profits have been awesome. The private sector has used the last two years to tighten its belt and cut the fat, leading to serious margin expansion that has the S&P 500 back to record profits from 2007.
And that’s an extremely important distinction, because when you buy and invest in a stock, you are not investing in the economy, you are investing in corporate growth.
Moving forward, Q2 earnings rage on this week, with the retailers getting ready to step up to the plate. The results have been pretty solid so far, continuing the strong trend of earnings growth over the last two years that has been supporting the market.
Other than that, let’s look for a little clarity on the debt ceiling to give the market some confidence.
Updates:
With the market trading falling into the red this week, gold fell into favor with investors, lifting PowerShares Double Gold (DGP) to a 2.5% gain. But in an interesting example of the difference between owning actual gold and gold mining stocks, Market Vectors Junior Gold Miners (GDXJ) fell 6.8% as equities as were punished across the board. Overall, the gold trade is looking strong, with gold hitting a new all-time high, so longer term GDXJ should be a good way to play that trend.
Amerigroup (AGP) experienced a bit of a meltdown this week, falling 18% on Friday after its Q2 results fell far short of analyst expectations. The miss was related to the company’s revenue stream out of Georgia, where AGP had been double charging some of its customers. Not exactly a great sign but also not a total game changer of the company’s core growth model. Looking forward, there will be some headwinds related to expenses and margin expansion, but overall this is still a top name in its space and a good way to play the long-term growth trend in Medicare and Medicaid.
Shifting back into some winners, dividend stocks also traded ahead of the market as investors sought shelter in more defensive assets. That helped limit McDonald’s Corp (MCD) losses to 2.35% and Buckeye Partners (BPL), with its 6.5% yield, to about the same at 2.27%.
Overall this was a tough week for stocks. But a lot of that weakness is related to the debt ceiling, so a little bit clarity on that issued would go a long way to help confidence.
That’s all for this week, until next time here is an article that discusses how assets traditional viewed as safe havens could be affected by a US default. Enjoy.
How Safe are Safe Havens in Debt Crisis?
Your Investment Partner,
Mike
