OVERVIEW ~ July 26 through 30 ~ The Dow Jones Industrial Average (DJIA) began the week at 10424.62, spent each day closing above that figure, and closed on Friday at 10465.94. Even stronger was its showing over the course of the month, with a 7.1% total rise in July. At the same time, interest rates continued to decline. The Freddie Mac average 30-year fixed-rate slipped two more basis points to 4.54% for the week, the lowest rate on record. And the 2-year and 5-year Treasury notes were bid to their lowest levels ever this past week in their auctions. By comparison, the Gross Domestic Product (GDP) posted a lackluster rise of 2.4% in the second quarter, after a 3.7% rise in the first quarter and a 5% rise in the final quarter of 2009.
FOCUS ~ A big question: How can there be so much apparent growth in corporate profits, and such a great month for the DJIA, while at the same time, Consumer Confidence and GDP are weak and interest rates remain at record lows?
On Tuesday we learned that corporate profits were up by 21% in the second quarter, but consumer confidence was down to its lowest level in nearly a year, with significant losses in survey respondent views of both the current economy and the nation’s near-term economic future. Equally remarkable was the fact that the DJIA kept rising slightly all week even though it had to shake off the effects of such negatives as the Beige Book report (a monthly statement by the Federal Reserve which noted only modest advances in retail sales and continuing tightness in bank lending).
A partial answer to the question regarding why corporate profits look so good while GDP has weakened can be found in reporting methods. GDP, seasonally adjusted, is reported on a quarter-to-quarter basis; corporate profits, not seasonally adjusted, are reported on a year-over-year basis. And since earnings figures were unusually low last year, they are much higher by way of comparison, even if some remain historically weak.
Still, earnings are indeed breaking out of past declines, and share prices are proving resilient, even in the face of weak economic news. We have a market, it seems, in which investors are trying to be ready both for improvement and for disappointment, as if hedging against both extremes. And in this economic environment, interest rates have been kept down by the continuing lack of confidence in the recovery.