Market Perspective for July 11, 2014

The Dow Jones Industrial Average and S&P 500 each overcame losses in early trading to close the day up 0.15 and 0.17 percent, respectively. The Nasdaq closed the day up 0.44 percent. For the week, the S&P 500 fell 0.90 percent and the DJIA lost 0.70 percent. After a strong rally over the past month, the Nasdaq retreated 1.6 percent for the week. Despite the modest losses, the outlook continues to be positive and we anticipate the markets moving higher as earnings season begins.

Stocks were rattled by trouble in the European banking sector this week, though the problems actually started when U.S markets were closed for the Independence Day holiday. A number of Austrian banks announced they would be taking large losses on loans in Eastern Europe. The situation was complicated even more with banking troubles in Portugal, a much smaller economy.

Investors have overreacted a few times to banking problems in Europe, and it seems to be the case again now, at least judging by the financial markets. Global X Portugal (PGAL) fell from $17.50 at the end of last week to $15.81 at the close on Friday, a drop of more than 9 percent. Such a fall generates headlines, but a better bellwether for this situation is iShares MSCI Europe Financial Sector (EUFN). Shares rebounded after losing over 4 percent to close the week down only 2.8 percent. Given the loss from the Austrian and Portuguese banks, the dip isn’t surprising. On the positive side, there is nothing so far in the news or in the chart of EUFN that implies a larger problem is brewing. A further rebound is likely over the coming weeks, similar to what occurred after the Cyprus bailout last year. That was a far worse situation and while markets were nervous for several weeks, they again resumed their uptrend.

In the United States, the big news this week was the Federal Reserve putting a possible end date to quantitative easing. Assuming unemployment, inflation and economic growth stay on track, the monetary injections will end in October. The Fed stated “If the economy progresses about as the Committee expects, warranting reductions in the pace of purchases at each upcoming meeting, this final reduction would occur following the October meeting.” There are only two intervening meetings before October: one at the end of July and one in mid-September. This is good for the economy in the long-run, but markets are likely to see increased volatility as investors adjust.

Other good new came this morning when Wells Fargo (WFC) reported its second quarter results. The firm delivered solid earnings, hitting its earnings per share forecast and beating revenue estimates. Loan growth was strong, with commercial loans up 3.6 percent and auto loans up 11 percent. The financial sector is a key component in analysts’ growth forecasts for S&P 500 Index earnings in the second half of the year. If this trend continues with financial firms, it bodes very well for the second half of 2014.

Investor Guide to Fidelity Funds Model Portfolio Performance since inception on January 1, 2012 through June 30, 2014:

Fidelity Select Sector Fund Portfolio: +61.35%
Fidelity Straight Growth Portfolio: +67.20%
Fidelity Balanced Growth Portfolio: +45.50%
Fidelity Global Portfolio: +47.70%
Fidelity Conservative Income Portfolio: +17.55%
NTF Diversified Sector Portfolio: +65.87%
NTF Straight Growth Portfolio: +52.96%
NTF Balanced Growth Portfolio: +42.52%
NTF Tax Advantage Portfolio: +38.40%
NTF Aggressive Value Portfolio: +40.32% (Inception on 7/1/12)

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