MarketView for July 21

 

 

Summary

 

Federal Reserve Chairman Ben Bernanke's dour assessment of the U.S. recovery hit stocks hard on Wednesday, as his comment that the economy faced "unusually uncertain" prospects rattled Wall Street. Stock prices fell sharply after Bernanke acknowledged the labor market's continued weakness while offering few specific options to stimulate lending and investment.

 

Bernanke spoke to the Senate Banking Committee in the first of two days of his semiannual testimony to Congress. His downbeat remarks sapped most of the buying interest even after a spate of strong earnings reports prior to the market's open.

 

Morgan Stanley was one of the day's few big winners after it reported stronger-than-expected profit, lifted by new business. The shares closed up 6.3 percent at $26.80. Wells Fargo also did well, closing up 0.6 percent at $26.06 after rising loan demand helped lift its earnings more than analysts had expected.

 

The benchmark S&P 500 found support during the regular session at its 14-day moving average and held above 1,060, a critical level according to some technical analysts. Apple rose 0.9 percent to $254.24 after it posted robust quarterly results, but the company's conservative margin forecast limited gains.

 

After the closing bell, Qualcomm moved up 4 percent to $37.59 on news its quarterly earnings and revenue exceeded Street expectations, the result of strong smartphone demand.

 

Other stocks doing well after the close in included eBay, up 4.1 percent to $20.99 as it too exceeded Wall Street estimates, helped by a record performance at its PayPal division.

 

Investors have been reluctant to make big commitments in equities due to growing worry about the economic outlook, sparked by disappointing economic data. Weighing on the Nasdaq was Yahoo, down 8.5 percent to $13.91 a day after it posted revenue that missed Street estimates.

 

Fed On Hold for Now

 

The Federal Reserve stands ready to ease monetary policy further if the budding U.S. economic recovery withers, Fed Chairman Ben Bernanke said on Wednesday, describing the outlook as "unusually uncertain."

 

However, the Fed still expects growth to be sustained despite a recent softening in the economy, Bernanke said in congressional testimony, playing down the risk of renewed recession and the possibility of deflation.

 

"We remain prepared to take further policy actions as needed to foster a return to full utilization of our nation's productive potential in a context of price stability," he told the Senate Banking Committee.

 

Nonetheless, Bernanke said the U.S. central bank was continuing "prudent planning for the ultimate withdrawal of monetary policy accommodation."

 

Although Bernanke said the chances of a fresh downturn were not high, Wall Street was surprised by Bernanke’s candid admission of lingering uncertainty.

 

Pressed on what the Fed could do to ease monetary policy further, Bernanke said it could reinvest mortgage bonds that are rolling off its balance sheet or engage in further debt purchases. It could also lower the rate it pays banks to park their excess reserves at the Fed, he said.

 

"If the recovery seems to be faltering, then we at least need to review our options. We have not fully done that review," he said.

 

While Bernanke left the door open to further easing as he delivered the central bank's semiannual monetary policy report to Congress, he made clear officials were still banking on a sustained, if sluggish, economic rebound.

 

"Although fiscal policy and inventory restocking will likely be providing less impetus to the recovery than they have in recent quarters, rising demand from households and businesses should help sustain growth," he said.

 

For now, he said the Fed expects economic conditions will warrant an exceptionally low benchmark federal funds rate for an "extended period" -- repeating a vow the central bank has kept in place for more than a year.

 

Bernanke said a weak job market was acting as a drag on consumer spending, and it would take a long time before the economy can restore the nearly 8.5 million jobs lost in 2008 and 2009.

 

Against that backdrop, he indicated inflation was not a concern and was unlikely to become a problem any time soon. Asked about the threat of deflation -- a broad, sustained decline in prices that could prove economically crippling -- Bernanke said he did not believe it would become a concern.

 

The Fed "expect continued moderate growth, a gradual decline in the unemployment rate, and subdued inflation over the next several years," Bernanke said.

 

Bernanke said the economy needed the fiscal stimulus it received but that a long-term plan for a sustainable fiscal path was crucial to hold interest rates down.

 

Asked about Beijing's currency policy, he said the United States would like to see the Chinese yuan appreciate "considerably further" but warned Congress against actions that could inflame trade relations.

 

In discussing how the Fed might go about eventually removing the extraordinary stimulus it has provided the economy, Bernanke said there was broad agreement among officials that asset sales will eventually play a role. He said any sales would be flagged well in advance.

 

For Some the Outlook is Looking Up

 

Three major manufacturers raised their guidance going forward on Wednesday, stating they were confident a rebound in demand for industrial goods would hold.

 

The shares of United Technologies, Textron and Eaton rose after they posted second-quarter numbers that exceeded Street expectations, easing concerns the economy might be sliding back into recession.

 

All three companies also posted better-than-expected revenues, meaning they had more than cost-cutting to thank for their growth. In addition, United Tech noted that orders, an indicator of future sales, were up across its business units, something Chief Financial Officer Greg Hayes called "a sign that the worst is behind us."

 

The numbers were in contrast to recent reports from General Electric, Bank of America and Citigroup, which exceeded Wall Street's earnings expectations, but missed on revenue.

 

United Technologies said it expects full-year earnings of $4.60 to $4.70 per share, representing growth of 12 percent to 14 percent. The company reported for the first time since 2008, quarterly organic revenue growth, a measure that factors out the effect of currency fluctuations and acquisitions.

 

Textron also posted results that exceeded forecasts. Textron expects to see earnings of 55 cents to 65 cents per share. Those numbers represent the possibility that the company might return to profit growth sooner than new CEO Scott Donnelly's target of 2011.

 

Donnelly, a former GE official who became Textron's CEO in December, acknowledged demand for big-ticket items, including Cessna jets, wavered late in the quarter in the wake of Greece's sovereign debt crisis.

 

"The pace of the recovery remains uncertain with the European sovereign debt concerns, which have negatively impacted business and consumer confidence," Donnelly said on a conference call with analysts. Profit growth at Textron's helicopter, military and industrial units offset a slide at Cessna.

 

Growth outside the United States has been a key boost for major manufacturers this year and the greatest risk many face is the possibility of slowing demand in Asia, which has been robust.

 

Eaton CEO Alexander Cutler cited that concern, although he expressed confidence the Cleveland-based maker of hydraulic and electrical systems would manage its way through it. Eaton is looking for earnings of $4.90 to $5.10 per share. It also said it would raise its quarterly dividend.

 

"While the debt problems in Europe are likely to slow the rate of growth in some European markets, and the rate of economic growth in China has moderated slightly, we anticipate solid global growth continuing during the second half of the year," Cutler said.

 

Textron shares rose 8 percent to $19.48 and Eaton rose 6 percent to $73.08, while United Tech shares were up less than 1 percent at $67.86.