S&P 500 rallies to close flat amid global turmoil

The investor should have a definite selling policy for all his common stock commitments, corresponding to his buying techniques. – Benjamin Graham

Despite a number of potential market-moving events last week that could have caused stocks to correct, both the S&P 500 Index and the Dow Jones Industrial Average barely budged. In a testament to the resiliency of the stock market, stocks climbed out of a hole early in the week and rallied to finish mostly flat. With still no resolution to the Greek debt crisis amid ongoing talks about implementing necessary reforms in exchange for bailout funds, investors must be asking themselves if this drama will ever end. Finance ministers in the euro zone were expected to convene over the weekend to evaluate yet another proposal from Greece to end the stalemate. Another potential roadblock for stocks has been the recent performance of China’s stock market and the threat of slowing growth in the world’s second largest economy. Since the middle of June, their market has plunged almost 30% as investors have fled in droves while regulators have attempted to stabilize the market with a number of different measures aimed at stemming these losses. By week’s end, government intervention in their markets was successful as stocks rebounded to close higher. Even a software upgrade glitch that shut down the New York Stock Exchange for nearly four hours could derail this bull market. Although there were definitely some anxious moments and frayed nerves, when trading eventually resumed, there was no panic and confidence was quickly restored. The release of the minutes from the most recent Federal Reserve meeting was also vague and inconclusive. The Fed indicated that there was no timetable for an interest rate hike and they weren’t clear what data they would need to see to raise rates. Investors looking for clues on the first rate hike clearly came away disappointed. So what might have been an ugly week for stocks turned into nothing more than a week that, despite all of the unsettling news, was basically unchanged.

Last Week

One of the biggest surprises last week was the 7% drop in the price of oil to $53 a barrel. Among the primary reasons for the decline were the chaos in Greece, the risk of contagion and another recession in Europe and the lifting of sanctions against Iran with a possible nuclear agreement. Other reasons cited for the decline include increased production of oil by the U.S. and OPEC, slowing growth in China and reduced year-end Wall Street forecasts for crude oil to $50 a barrel from $55 a barrel.

In a speech in Cleveland on Friday, Fed Chair Janet Yellen said that the economy is improving, unemployment is falling and inflation is picking up, although it is still below the Fed’s target of 2%. She also expects to raise the federal funds rate this year but emphasized that the path of the economy is uncertain and unanticipated developments could postpone the first rate hike.

For the week, the Dow Jones Industrial Average edged up 0.2% to close at 17,760 while the S&P 500 Index finished basically flat at 2,076. The Nasdaq Composite Index shed 0.2% to close at 4,998.

This Week

Unlike last week, this week’s economic calendar is full. Retail sales for June are forecast to increase only 0.3%, far less than the 1.2% increase registered in May. Both the June producer price index (PPI) and the consumer price index (CPI) should rise 0.3% as gas prices are expected to be higher. June industrial production is predicted to show a modest increase while June housing starts are also expected to rise slightly from the previous month. Federal Reserve Chair Janet Yellen will give her assessment of monetary policy and the economy before the House Financial Services Committee on Wednesday.

In overseas news, Euro-zone finance ministers will meet to review Greece’s fate and China reports second quarter GDP, which is expected to increase about 7%.

Second quarter corporate earnings reports will be dominated by the financials this week with JP Morgan Chase, Wells Fargo, Bank of America, Citigroup and Goldman Sachs all scheduled to report. Other major companies on the calendar include General Electric, Honeywell, Google, Intel, Johnson & Johnson, UnitedHealth Group, Schlumberger and Philip Morris International.

Portfolio Strategy

Second quarter earnings season gets into full swing this week with over fifty companies in the S&P 500 Index scheduled to report. Analysts are expecting corporate earnings to be weak with profits forecast to fall 4.4%, the first decline since the third quarter of 2012. The two biggest negatives are the energy sector, whose earnings are expected to decline over 50%, and a strong dollar, which has reduced foreign earnings of U.S. multi-national companies. If earnings in the energy sector are excluded, overall profit growth for the S&P 500 would be about 8%, with the best performance coming from the health care, financial and consumer discretionary sectors. If last week is any indication, it’s entirely possible that conservative analyst estimates have been reduced enough that companies should be able to surpass these lowered expectations. Although traditional front-runner Alcoa slightly missed its earnings estimate, it reported better than expected revenue. Walgreen Boots Alliance and PepsiCo followed with better than expected earnings and Walgreen raised its outlook for the year. While three earnings reports is hardly representative of the corporate earnings season, they do provide a promising start and more of the same could give the stock market a much-needed boost.