Weekly Market Insights

1. Weekly Market Insights Dow Jones:14909 YTD 15.19% ‌ │ S&P 500: 1606 YTD 13.82% │ NASDAQ: 3403 YTD 13.42% July 1, 2013 The Fed Explains? It now seems clear that the market misinterpreted Chairman Bernanke's message. Investors and pundits in their rush either to be first or have a unique slant on anything new jumped to the conclusion that they were going to unwind QE3 on a specific timetable. Legions of high-level Fed officers came out to deny that there was a specific timetable. Investors seemed to calm down, and much of the earlier losses were recouped. Last week we wrote about some of the specific requirements that would have to be met if the Fed were to end QE3. Most involved a strong economy, certainly stronger than we have now. Recent statistical releases have not led one to be optimistic that the economy is gaining enough momentum to bring the unemployment rate to 7%, which is one of the criteria. The other motivating factor for investor concern was the very disappointing economic news on China. There is no doubt that China is in a continuing slowdown. There are many theories about what caused this. We don't know the immediate cause, but certain things are obvious, and we wrote about most in earlier editions. First and foremost, it is easier to catch up than lead, and as China grows, the same tactics that led to rapid growth as an underdeveloped economy can lead to problems as the economy grows. As China developed into an aggressive export-led economy, it invested heavily in state-owned enterprises (SOE) that had little or no competition. This, of course, led to a great deal of misallocation of capital. China's banking system was not well controlled, allowing a shadow banking system to function with very little control. Then, just as the west fell into financial trouble (2008-9), China panicked and flooded the system with money to finance projects that had very little hope of breaking even.¹ As the export market folded, their problem became ever more acute. This, in our view, leaves China with a long-term problem. China certainly is not going "down the drain" but the slowdown will most likely continue. We do not believe at this time that it will be serious enough to hurt the U.S economy to the point where it brings a significant slowdown, but it must be watched. ¹Derek Scissors, Ph.D., Heritage Foundation The views expressed are subject to change. Any data cited have been obtained from sources believed to be reliable. The accuracy and completeness of data cannot be guaranteed. Past performance is no guarantee of future results. • The Week Ahead: • MONDAY: Italy Unemployment Rate (SA) expected at 12.10%, EC Euro-Zone Unemployment Rate 12.30%, US Construction Spending (m/m) expected at 0.60% • TUESDAY: EC Euro-Zone PPI (m/m) expected at -0.20%, US Factory Orders expected at 2.00% • WEDNESDAY: EC Euro-Zone Retail Sales (m/m) expected at 0.30% • THURSDAY: Russia CPI (m/m) expected at 0.50% • FRIDAY: Germany Factory Orders (m/m) (sa) expected at 1.20%, Canada Unemployment Rate expected at 7.10%, US Unemployment Rate expected at 7.50%