DJIA / Market Close for Friday, July 29, 2011

THIS WAS THE WORST WEEK FOR STOCKS IN 2011.

The Dow today closed down -96.87 (-0.79%) at 12,143.24.

So, this is how bad this past week was. For the week, DJIA was down -4.2%, Nasdaq -3.6%, S&P 500 -3.9% and the Russell 2000 was down a whopping -5.3%. That left year-to-date gains standing at +4.9% for DJIA, Nasdaq +3.9%, S&P 500 +2.8% and Russell 2000 with +1.7%. My favorite mutual fund PSVIX was down -4.34% for the week leaving year-to-date gains at +5.4%.

The major indices fell on concerns regarding the inability of Congress to reach a deal on raising the debt ceiling and slow second quarter GDP growth. Roughly one third of S&P 500 companies reported earnings this week, though the market’s focus was on the debt situation.

All 10 sectors within the S&P 500 ended in the red. Industrials tumbled 6%, materials gave up 5% and energy shed 4.6%.

Despite the lack of debt deal, selling pressure in the equity market and risk of a debt downgrade, the 10-year Treasury surprisingly rallied, with the yield ending the week at 2.80%, a decrease of 18 bps. Equities have been taking on the chin with the uncertainty regarding the U.S. debt situation.

Prediction market InTrade places only a 7% chance the debt ceiling will be raised prior to July 31. There is an 82% chance for the ceiling to be increased by the end of August, so the market is pricing in a chance that the deal could be reached prior to the Aug. 2 deadline.

Second quarter GDP rose just 1.3% on the heels of a downwardly revised and scant 0.4% increase in the first quarter.

With respect to second quarter GDP, the growth scales were tipped higher by positive contributions from exports, nonresidential fixed investment, private inventory investment, and federal government spending that was offset partly by negative contributions from state and local government spending.

Real PCE was up just 0.1% after a 2.1% increase in the first quarter and contributed 0.07 percentage points to the overall change in real GDP. Real final sales of domestic product, however, were up 1.1% after increasing less than 0.1% in the first quarter. Real final sales is GDP less the change in inventories.

The latest initial claims report brought a measure of good news. Claims for the week ending July 23 dropped by 24,000 to 398,000. That is the first week below 400,000 since early April and more importantly, there were no special factors behind the improvement.

This week was busy in terms of earnings reports. Roughly one third of S&P 500 posted their quarterly results and now about 70% of companies have reported. About 68% of companies have posted earnings ahead of analyst expectations.

So, I’m hoping for a debt deal and hot run higher next week.

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