Calm before the storm….

Bull market: An upward movement in prices causing an investor to mistake himself for a financial genius. – Anonymous

Last week could best be characterized as calm before the storm as the importance of last week’s economic data pales by comparison with what is scheduled for this week. Although there was the release of data on U.S. housing, manufacturing and jobs, none of the results was responsible for moving the markets as both the Dow and the S&P 500 finished the week virtually flat. It wasn’t for a lack of earnings reports, either, as a steady stream of second quarter earnings reports continued but failed to ignite or derail the current bull market in stocks. Perhaps it was the absence of any comments by Fed Chairman Bernanke that caused the stock market to take a breather. Whatever the reason for the relative calm, it all should come to an end this week as the Federal Open Market Committee meets again, second quarter GDP and July employment figures are released and corporate earnings announcements continue unabated. With such high profile, potentially market-moving data on tap, this week could possibly hold the key for what is in store for the market in August. Comments about Fed tapering coupled with weak economic data and corporate earnings could cause the bull market to pause or pull back from its all-time highs.

Last Week

As the week got underway, U. S. home sales fell in June by 1.2% after two months of healthy gains. However, prices surged as the median price of homes rose 13.5% from a year ago. Manufacturing data was also positive as the preliminary purchasing managers’ index rose in July to the highest level in four months, a sign that this sector was still growing, albeit at a slow pace. While jobless claims were somewhat higher, durable goods orders were up a much better than expected 4.2%, boosted by a huge increase in orders for commercial aircraft. The week ended on a positive note, too, as consumer sentiment in July rose to a reading of 85.1, the highest level in six years. On balance, then, the economic data supported the fact that the economy continues to grow but at a modest pace.

For the most part, earnings reports for the second quarter were also favorable. The most anticipated announcement came from Apple and although the company reported lower earnings from a year ago, it managed to beat expectations on much larger shipments of the iPhone. The stock rose 5% on the news. Other notable companies that reported solid earnings included Du Pont, United Technologies, Boeing, Facebook, Ford and General Motors. GM was also the beneficiary of news that Consumer Reports named the updated Chevy Impala as the best new sedan. Negative earnings surprises came from McDoanld’s, which reported weak sales in Europe and Asia, and Caterpillar, which saw a drop of 43% in earnings.

For the week, the Dow Jones Industrial Average barely budged as it finished the week at 15,559, up 0.1%. Likewise, the S&P 500 fell less than a point to close the week at 1,692. The Nasdaq, however, rose 0.7% to end at 3,613, helped in part from the Apple and Facebook earnings news.

This Week

Corporate earnings announcements could take a back seat this week to the all-important GDP and employment data as well as the Fed meeting. All eyes will be focused again on Ben Bernanke to see what his latest thinking is on the economy, inflation and short-term interest rates, which at current levels remain higher than the Fed wants. Second quarter GDP, while expected to show continued growth in the economy, could be less than one percent, which comes on the heels of just 1.8% GDP growth in the first quarter. The unemployment rate probably will remain stubbornly high at 7.6% but nonfarm payrolls could be about 190,000, in line with the previous month. Other less important economic data due out this week include June personal income, factory orders and consumption, all of which should meet or exceed estimates.

Also, on the earnings front, the news so far has been fairly upbeat as the majority of companies have reported better than expected earnings. Zacks Investment Research reported that of the some 240 companies that have announced their results, earnings have risen 4.1% while revenues have increased 3.8%. Another full slate of reports are due out this week, including such prominent companies as Exxon Mobil, Kraft, Merck, Pfizer, Comcast, Chevron and Procter & Gamble. If the past is any indication of the future, expect positive earnings news to continue as no major surprises are expected.

In overseas news, the European Central Bank will meet and is expected to leave interest rates unchanged and the Bank of England likely will do the same in its outlook going forward. Toyota Motor and Honda Motor also report earnings, which should be positive if the Ford and GM reports are any indication.

Portfolio Strategy

The question one has to ask is can the stock market continue to add to its gains or is the market getting tired and due for a correction. The average bull market since 1949 has lasted for 64 months while this bull market is in its 52^nd month. The rally in stocks that has seen the S&P 500 rise almost 19% this year has been broad-based, with all sectors participating and asset classes such as small and mid-cap stocks posting even higher returns. Large cap dividend growth and high-yielding dividend stocks have also recovered from their sell-off last month to post similar attractive returns for the year. Even European stocks have rebounded 21% despite the ongoing recession as monetary policy on the continent continues to keep interest rates low. This rebound has improved the year-to-date performance of international funds benchmarked to the EAFE (Europe, AustralAsia and Far East) Index.

Historically, August has been a slow month as many market participants take vacation and corporate earnings news slows to a crawl. While a mild correction is not out of the question, most investment strategists and economists are forecasting better economic growth in both the U.S. and Europe for the remaining five months of the year. The wild cards in this prediction are China, where growth could prove to be disappointing, and the Federal Reserve, where any missteps with regard to tapering could be harmful. We choose to view the glass as half full rather than as half empty and are still constructive on the market.