Two good articles below from today's Wall Street Journal analyzing the recovery or lack thereof.
The financial headlines for today are:
1) Rally stalls as Moody's cuts Portugal debt rating-From the AP
The first week of July is off to a much slower start than the last week of June, when stocks had their biggest gains in two years.
Major indexes were mixed for much of the day Tuesday but dipped in afternoon trading after Moody's downgraded Portugal's debt to "junk." The credit ratings agency cited concerns that Portugal will not be able to meet targets to reduce its deficit due to the "formidable challenges" the country is facing in cutting spending.
The Dow Jones industrial average fell 12.90, or 0.1 percent, to close at 12,569.87. The Dow had risen as many as 19 points in morning trading after the Commerce Department reported an increase in orders for manufactured goods.
The Standard & Poor's 500 fell 1.79, or 0.1 percent, to 1,337.88. The Nasdaq composite index rose 9.74, or 0.3 percent, to 2,825.77.
Bond prices rose, sending their yields lower, as investors sought out the relative safety of Treasurys. The yield on the 10-year Treasury note fell to 3.12 percent from 3.19 percent late Friday.
Investors have been worried that Europe's debt problems could slow the global economy and cause a crisis for European banks. "The European debt crisis is going to be with us for a while," said David Kelly, chief market strategist at J.P. Morgan Funds. "There still is a very big issue out there."
Trading volume was light as many traders took vacations. U.S. markets were closed Monday for the July 4th holiday. Many investors are looking ahead to next week, when aluminum maker Alcoa Inc. becomes the first major U.S. company to report financial results.
Last week the Dow rose 648 points, its best week in two years, after Nike reported strong earnings and Greece cleared its final hurdle before receiving another round of loans. Automakers also reported that their sales rose 7 percent in June compared with the same month a year ago.
The gains erased nearly six weeks of losses. Prior to last week stocks had been falling since late April because of concerns about the debt crisis in Europe, weak home sales in the U.S. and slowing manufacturing. By mid-June, stocks had given up most of their gains for the year.
With last week's rally, the Dow is now down just 1.8 percent from April 29, when it reached a three-year high. The Dow is up 8.6 percent for the year. The S&P 500 index is up 6.4 percent and the Nasdaq composite is up 6.5 percent.
Analysts are optimistic about the corporate earnings reports that will start to come in next week. Earnings from companies in the S&P 500 index are expected to rise 14 percent from the same period a year ago, according to FactSet. Revenue is expected to rise 11 percent.
2) Weak Economic Rebound Suggests Statistical Parallels to 1980 and Other Anemic Upturns-From The Wall Street Journal
The U.S. economic recovery that began in June 2009 in many ways mirrors the short-lived one that started in 1980 and was quickly followed by another recession in 1982, induced when the Federal Reserve pushed up interest rates to fight inflation.
The only time unemployment was higher than May's 9.1% rate at this point in a recovery was two years after the 1980 recovery, smack in the middle of the 1982 recession that followed.
Several other indicators in the accompanying chart paint a similar picture of a subpar recovery:
• Inflation-adjusted after-tax incomes of Americans, up 2% since June 2009, haven't grown so meagerly in the early stages of any other post-World War II upturn.
• The nation's annual inflation-adjusted economic output, up 5.5% from where it stood at the recession's end, has advanced by less only one time in the first two years of a recovery—the 1980 recovery.
• Home prices, down 8.8% 18 months into the recovery, adjusting for inflation, are much worse than they were during the 1991 recovery, which was also marked by a lingering real estate downturn in places like California and Massachusetts. They most closely track the aborted 1980 recovery.
• Bank lending to businesses and households, down 4% since the recovery started, is also the worst on record.
To assess how the economy has performed, the Wall Street Journal tracked a range of economic indicators from June 2009, which is when the National Bureau of Economic Research says the recession ended. It then examined how these measures performed over similar post-recession periods determined by the NBER.
The news isn't all bad. Corporate profits, manufacturing employment and exports are performing at least as well as they have in several other recoveries. Profits, for example, were up 47% over the first 21 months of the recovery.
On average since World War II, they have risen 35% during that stretch.
Exports were up 21%, compared with an average of 11% in other recoveries. The problem is the export sector isn't large enough at this point to drive the whole $14 trillion economy.
Taken together many economists agree on how this recovery stacks up: "It is the worst, no question about it," says Robert Gordon, a Northwestern University professor and a member of the National Bureau of
Economic Research's business cycle dating committee, which is widely considered the official arbiter of the beginning and end of recessions.
His colleague, Stanford professor Robert Hall, who runs the committee, says it's "absolutely right" that this is the worst recovery yet.
3) Inside the Disappointing Comeback-From The Wall Street Journal
Two years ago, officials said, the worst recession since the Great Depression ended. The stumbling recovery has also proven to be the worst since the economic disaster of the 1930s.
Across a wide range of measures—employment growth, unemployment levels, bank lending, economic output, income growth, home prices and household expectations for financial well-being—the economy's improvement since the recession's end in June 2009 has been the worst, or one of the worst, since the government started tracking these trends after World War II.
In some ways the recovery is much like the 1991 and 2001 post-recession periods: All three are marked by gradual output growth rather than sharp snap-backs typical of earlier recoveries. But this recovery may remain lackluster for years, many economists say, because of heavy household debt, a financial system still damaged by the mortgage crisis, fragile confidence and a government with few good options for supporting growth.
There are bright spots. Exports, particularly of manufactured and agricultural goods, are improving, in part because of booming developing-country economies and the weaker dollar. They are expected to pick up in the second half of the year as the temporary shock fades from Japan's earthquake and tsunami. In a hint of this, the Institute of Supply Management on Friday reported an uptick in manufacturing for June. Higher corporate profits, stock prices and business investment also are supporting the expansion.
Still, broader problems are holding the economy back.
Banks are less able or willing to lend than before the recession. Since the recovery started, banks have reduced money they make available through credit card lines from $3.04 trillion to $2.69 trillion and have reduced home equity credit lines from $1.33 trillion to $1.15 trillion, according to the Federal Reserve Bank of New York.
Policy makers, meanwhile, are reluctant to do more to stimulate economic growth. The Federal Reserve has already pushed short-term interest rates to near zero. Two rounds of quantitative easing that including purchasing $1.425 trillion in mortgage bonds and $900 billion in Treasury debt helped to stabilize the economy but failed to spur a vigorous recovery.
Likewise, fiscal stimulus, either in the form of tax cuts favored by Republicans or spending increases favored by Democrats, looks unlikely given large federal deficits and the disappointing results of earlier efforts, including President Obama's $830 billion stimulus program of 2009.
The biggest problem may be household indebtedness. At the peak of the economic boom in the third quarter of 2007, U.S. households collectively had borrowed the equivalent of 127% of their annual incomes to fund purchases of homes, cars and other goods, up from an average of 84% in the 1990s. The money used to pay off that debt means less available for new spending. Households had worked their debt-to-income levels down to 112% by the first quarter, in part because banks have written off some debt as uncollectible.
Quote of the Day from Dave Ramsey.com:
The only way of finding the limits of the possible is by going beyond them into the impossible. — Arthur C. Clarke
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