8/31/2012
By Carlos Guillen, Research Analyst

More Articles by Carlos Guillen

Equity markets ended the Friday trading session in winning territory after a rather tough trading week full of anxiety, as investors waited for Ben Bernanke's speech. And overall, we can take a small sigh of relief as the hope for stimulus is still alive, and sentiment actually improved, wow!

Quite encouragingly, sentiment data showed that the consumer has become a bit more confident in spite of a still depressing jobs backdrop. The University of Michigan Consumer Sentiment August final result landed at 74.3, which was higher than the Street's expectation of 73.6 and represented the highest reading since May of this year. It is apparent that consumers' sentiment improved as they have been able to reduce their debt levels and take advantage of lower priced consumer goods and low interest rates. However, that is where the favorable feelings end, as consumers' outlook deteriorated further. The expectations index slipped to 65.1 from 65.6, the lowest since December and the third consecutive monthly decline. The majority of households expected no income increase during the year ahead, and they also see their buying power diminishing as a result of inflation. Consumers say that their current economic position is worse now than it was five years ago, and even more discouraging was that they do not see their position getting any better in the next five years. Also in the minds of consumers is the direction of fiscal policies; the uncertainty of changes in taxes and government spending is making consumers very cautious in their spending patterns, particularly as we near the end of the payroll tax cuts in January.

Perhaps adding to the belief of slowing U.S. economic growth, data from ISM-Chicago showed that the region was expanding at a slower rate than expected. July Chicago PMI dropped to 53.0 from the 57.3 level reached in the prior month, landing below the Street's consensus of 53.8. It should be noted that levels above 50 signify growth, so July's result still means there will be growth but just not as high as it had been for some time. A broader economic measure of manufacturing comes out on Tuesday of next week, and this should shed more light on the degree of slowing growth in the U.S. economy.

Clearly the main driver today was that stimulus is still on the table as Federal Reserve Chairman Ben Bernanke said today he would not rule out further bond purchases to boost growth and reduce unemployment, which he called a grave concern. Although markets responded favorably to his words, as expected stocks have pulled back and forth, but still ended the session in winning ground, so for now we can take a sigh of relief.

Carlos Guillen
Wall Street Strategies