Pre-Fourth of July Fireworks for Equity Prices

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It’s certainly been a tumulteous first half of the year in the stock market, with signs of upheaval, unexpected downward surprises, and disappointing returns for investors across the board. Worries about how Greece and several other European nations will handle their debt problems, and recent signs of weakness for our own U.S. economy, have certainly weighed in on our markets as of late. In addition, concerns that China’s economy, the world’s second largest and crucial to the commodity markets is now apparently slowing, just adding to the angst. Fortunately, the last week of June brought some bright spots to an otherwise dismal picture.

For the last week in June, the Dow Jones Industrial Average ended the pre-holiday week up by some 648 points, and now sits at the 12,583 level, and that 5.4% gain was its biggest since July 2009.The broader Standard & Poor’s 500 rallied for five straight days to reach the 1,340 ark, with last week’s 71-point gain its biggest since March 2009. Even the lagging tech-laden Nasdaq Composite Index got into the act as it jumped 163 points, or 6.2%, to 2,816, while the smaller-cap stocks as represented by the Russell 2000 leaped by 42 points, or 5.3% to 840.

Thankfully this rally over the last week of June helped narrow the month’s losses to 1.2% for the Dow, 1.8% for the S&P 500, 2.2% for the Nasdaq and 2.5% for the Russell 2000. The Dow finished the second quarter up 0.8%, its eighth gain in nine quarters, but the S&P ended a three-quarter run and pulled back by some 0.4%. Meanwhile, the Nasdaq and the Russell also absorbed small quarterly losses of 0.3%, and 1.9%, respectively.

As we look out into the second half of the years, many experts are predicting only modest gains, as consumers try to get their balance sheets in order amid a still-weak housing market. The best bet seems to be that the U.S. economy will continue to muddle along, growing at a subdued annual pace of around 2%, an environment in which the market slowly moves higher, and dividend-enhanced stocks lead the way. As Birinyi Associates calls it, “This is an economy that’s walking forward instead of sprinting.” However, it’s still a big mistake to get too gloomy about the markets and to flock to only stable businesses or to Treasury bonds. For one thing, dropping oil prices and falling mortgage rates could still give consumers a boost, even though unemployment remains high and wage growth limps along.

Thanks to a bailout of the Greece’s fiscal problems, the rise in Treasury yields that had been forecast for the first half of 2011 took place all in the past week. Not only was a Greek default prevented, but also in addition, we had better economic data and dispelled notions of a double-dip recession. The yield on the benchmark 10-year rose to 3.21% this past Friday after hitting a six-month low of 2.84% the previous Monday. However, investors ventured away from the safe harbor of Treasuries to get on board the equity rally in stocks. Many experts now feel that we’ll see higher Treasury yields in the second half of this year since they feel that the economy is beginning to emerge from a soft patch. Another factor figured to push up Treasury yields is that the $600 billion treasury purchase program ended this past Thursday. In addition, Pimco’s co-chief investment officer Bill Gross feels that the lack of Fed buying will continue to drive up treasury yields.

As we get back from our Fourth of July festivities, we’ll be greeted with some important economic data points. On Tuesday we get factory orders for the month of May, and it’s expected that this tally will rise around 1%. On Wednesday, it’s the ISM non-manufacturing index for June, and the expectation is that we’ll see a half-point decline. Come Thursday, we’ll get the weekly jobless claims figures along with the big chain-store retailers report. Weekly jobless claims are seen falling 420,000 while the retail report should produce some broad gains from the previous month. Friday is the biggest data point day of the week with the June nonfarm payrolls report and unemployment rate. It’s expected that nonfarm payrolls will have grown by mere 100,000, with the unemployment rate staying steady at 9.1%.

With the lazy, hazy, crazy days of summer now upon us, let’s hope the second half of the year will be less volatile than the first. According to Stock Trader’s Almanac, July ranks as the best month for the third quarter for both the Dow and the S&P 500. On the other hand, it marks the start of the worst four months of year for the Nasdaq. In the past eleven years, the Dow and S&P 500 have averaged a return of 1.24 percent and 0.16 percent, respectively, while the Nasdaq Composite has posted a loss of -0.45 percent.

Until next week, try to stay cool, calm and collected.

Sources: Barron’s, Wall Street Journal, Yardeni Research, Associated Press, Econoday, Gorilla Trading, Dow Jones & Company, SmartMoney

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