Donald Travis, Cameron, TX
Fidelity Navigator subscriber since November, 2001
This is the “Navigator Weekly Commentary” for the week ending August 22, 2008.What a difference a day makes for the bulls. After being battered by a sharp jump in crude oil yesterday, those wounds were quickly healed by an almost $7 per barrel fall as the dollar resumed its rally to lead commodities higher. Financials posted a solid advance to help stocks rally, leading the Dow Jones Industrials to a triple-digit gain. Earlier upbeat comments from Warren Buffett on CNBC also aided the favorable backdrop on the Street. Airlines and consumer-related issues benefited from the pullback in crude, while the cautiously upbeat remarks on inflation from Fed Chief Ben Bernanke also sweetened the mood among traders; however, volume was light. Treasuries were lower amid the rise in equities.
The Dow Jones Industrial Average jumped 198 points (1.7%) to close at 11,628, the S&P 500 Index advanced 14 points (1.1%) to 1,292, while the NASDAQ Composite rose 34 points (1.4%) to 2,415. On light volume, 888 million shares were traded on the NYSE, and 1.4 billion shares were traded on the NASDAQ. Crude oil fell $6.59 to $114.59 per barrel, wholesale gasoline dropped $0.18 to $2.87 per gallon, and gold ended down $11.30 at $827.70 per ounce. For the week, the DJIA closed 0.3% lower, the S&P 500 Index was down 0.5%, and the NASDAQ Composite fell 1.5%.
At the Federal Reserve Bank of Kansas City's annual symposium in Jackson Hole, Fed Chief Ben Bernanke spoke on financial stability and said the economic and policy environment is among the most challenging in memory, while the financial storm “has not yet subsided.” He discussed the major elements of the Fed’s strategy to contain the impact of the credit crisis but said the effect on the broader economy is becoming apparent in the form of softening economic activity and rising unemployment.
Bernanke noted the recent decline in commodity prices and stability of the dollar has been encouraging. Coupled with the possibility that growth will “fall short of potential for a time,” Bernanke said inflation may moderate later in the year and 2009, assuming the dip in raw materials and the uptick in the dollar does not reverse. Still, he was quick to point out that the outlook for inflation remains “highly uncertain” and said officials "will act as necessary" to make sure prices moderate. Treasuries were lower on the short-to-mid end of the curve as the equity markets rallied. The yield on the 2-year note rose 11 basis points to 2.41%, the yield on the 10-year note gained 4 basis points to 3.87%, and the yield on the 30-year bond was unchanged at 4.47%.
Recently, the bulls have been given a bit of a reprieve from elevated inflation expectations as commodities, led by crude oil, pulled back significantly. Also, the dollar had been strengthening to help boost sentiment on the Street. But this week, those fears about inflation resurfaced and the greenback retraced some of its recent rally and stocks came under pressure, reducing the slack that had been given to the Federal Reserve to focus slightly more on the other side of its dual mandate of promoting economic growth. Exacerbating the inflation worries, the year-over-year rate of the Producer Price Index posted the biggest rise in 27 years, to join last week's 17-year high in the year-over-year rise in the Consumer Price Index. Financials also added to the gloomy backdrop as more analysts warned of more pain to come in the sector and fears about the future of government sponsored enterprises (GSE) Freddie Mac and Fannie Mae weighed on the sector to make them the worst performers for the week.
However, the bulls can take some solace in the fact that volume was light this week and on Friday, commodities fell to relinquish Thursday's sharp rally, which saw oil climb almost $6 per barrel, and the dollar renewed its recent run to pare losses in equities for the week. In other news, Lehman Brothers may be a takeover target, Gap topped the Street’s profit estimate and Intuit matched.
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With several key releases such as durable goods orders, preliminary second quarter GDP, and the Core PCE Price Index released on Wednesday, Thursday, and Friday, respectively, next week's economic calendar will be bursting at the seams. With second quarter earnings season pretty much in the books, the macroeconomic environment will likely be the main source of sustenance for sentiment on the Street, although volume will likely be light again ahead of the Labor Day weekend.
The week will kick off in high gear on Monday with the housing market in focus, which remains maligned and probably the most vital factor in this economic recovery. Existing home sales will be released on Monday and are forecast to gain 0.9% to an annual rate of 4.91 million units. The estimated increase in sales is welcomed as existing home sales have experienced a precipitous decline since the burst of the real estate bubble. Uncomfortably high inventory levels and a 6.1% decline in year-over-year median home prices in June have resulted from the duress the market has been under. Inventory levels rebounded to an 11.1 months supply of homes on the market and we need to see this level fall before we can begin to see a stabilization in the market and the economy gain any traction. Unfortunately, tight lending standards in the banking industry remain and are keeping buyers on the sideline, so we have yet to gain confidence that we are seeing signs of recovery in the housing market.
Other key reports due out next week to look for include, consumer confidence, new home sales and the Fed's minutes from its August 5 monetary policy meeting all on Tuesday, weekly initial jobless claims on Thursday, while the week will end with the personal income and spending, the Chicago PMI, and final University of Michigan Consumer Sentiment Index.
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