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Mixed Growth Expectations Stoke Volatility

Markets ended another volatile week mixed, pummeled by concerns about global growth but buoyed by better-than-expected earnings results. For the week, the S&P 500 ended flat, the Dow lost 0.82%, and the Nasdaq gained 0.39%.[1]

As of last Friday, just under half the S&P 500 companies had reported earnings, and the vast majority (69% and 63%, respectively) had beaten both earnings and revenue expectations.[2] Though there were some high profile-earnings misses, the overall picture seems to be one of redemption and resilience. The percentage of better-than-expected results are up from the first quarter, meaning company growth likely accelerated; it’s also a good sign for future expectations, given that the economy is doing much better overall than it did earlier in the year.

That being said, some red flags about economic growth were raised last week. Mixed business spending data – a core component of Gross Domestic Product (GDP) calculations – may erode Q2 economic growth. While businesses spent more on core capital goods like computer equipment and automobiles, the value of shipments declined for the third month in a row, which led the International Monetary Fund to cut its 2014 U.S. growth forecast.[3] On the other hand, durable goods inventories rose 0.4%, which is a great improvement over the slow inventory growth that contributed to the Q1 economic contraction.[4] We’ll know more after this week’s official GDP report.

The week ahead may be the busiest of the summer, with over 140 S&P 500 companies releasing earnings.[5] The Federal Reserve Open Market Committee meets on Tuesday and Wednesday to ponder next steps in monetary policy. Will they announce another $10 million taper to bond purchases? Probably. But, their comments will tell us a lot about how they feel about the economy.

The economic calendar is also full of major reports. Traders will get their first look at official Q2 GDP numbers on Wednesday as well as the July Employment Situation report on Friday. Given global worries about economic growth, we can expect some volatility as traders hedge their bets ahead of the data.

ECONOMIC CALENDAR
Monday: Pending Home Sales Index, Dallas Fed Mfg. Survey
Tuesday: S&P Case-Shiller HPI, Consumer Confidence
Wednesday: ADP Employment Report, GDP, EIA Petroleum Status Report, FOMC Meeting Announcement
Thursday: Jobless Claims, Employment Cost Index, Chicago PMI
Friday: Motor Vehicle Sales, Employment Situation, Personal Income and Outlays, PMI Manufacturing Index, Consumer Sentiment, ISM Mfg. Index, Construction Spending

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

HEADLINES:

Stiffer sanctions rattle Europe. The prospect of new sanctions against Russia over the crisis in Ukraine is shaking European confidence over economic growth. Europe is Russia’s biggest trading partner, and sanctions could bite deeply into European growth.[6]

New home sales drop sharply. Sales of new single-family homes fell 8.1% in June to the lowest level since June 2013; May numbers were also revised downward, suggesting that the housing market is still losing steam.[7]

Nationwide, layoffs are rarer. Improving economic prospects and confidence among employers is translating to fewer layoffs, as evidenced by the lowest levels of new unemployment applications seen since 2006. Will this be a turning point in the labor market recovery?.[8]

Consumer inflation rises. Consumer prices, a measure of inflation, rose in June with skyrocketing gasoline prices. However, core inflation, which excludes volatile categories like food and fuel, remained consistent with a gradual increase due to healthy economic expansion.[9]

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Diversification does not guarantee profit nor is it guaranteed to protect assets.

The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896.

The Nasdaq Composite is an index of the common stocks and similar securities listed on the NASDAQ stock market and is considered a broad indicator of the performance of stocks of technology companies and growth companies.

The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indexes from Europe, Australia and Southeast Asia.

The Dow Jones Corporate Bond Index is a 96-bond index designed to represent the market performance, on a total-return basis, of investment-grade bonds issued by leading U.S. companies. Bonds are equally weighted by maturity cell, industry sector, and the overall index.

The S&P/Case-Shiller Home Price Indices are the leading measures of U.S. residential real estate prices, tracking changes in the value of residential real estate. The index is made up of measures of real estate prices in 20 cities and weighted to produce the index.

The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

Google Finance is the source for any reference to the performance of an index between two specific periods.

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Past performance does not guarantee future results.

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[1] http://goo.gl/ssCNCv

[2] http://www.cnbc.com/id/101867227  

[3] http://abcnews.go.com/Business/wireStory/imf-cuts-forecast-us-economic-growth-2014-24679367 

[4] http://www.reuters.com/article/2014/07/25/us-usa-economy-durablegoods-idUSKBN0FU19N20140725 

[5] http://www.cnbc.com/id/101868173 

[6] http://www.reuters.com/article/2014/07/27/us-economy-global-weekahead-idUSKBN0FW06220140727  

[7] http://www.cnbc.com/id/101863962 

[8] http://www.cnbc.com/id/101867062 

[9] http://www.reuters.com/article/2014/07/22/us-usa-economy-inflation-idUSKBN0FR19O20140722 

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