Sunday, January 30, 2011

US markets fall on poor earnings and Egypt

US stock markets fell this week on disappointing earnings from major corporations and unrest in Egypt. On Friday, the crisis in Egypt caused the S&P 500 to fall 23.19 points or 1.78% to 1,276.35, and the Dow to drop 166.13 points or 1.39% to 11,823.70. 

As tens of thousands of people demonstrated across Egypt, calling for the President's resignation, tanks entered Cairo. For the week, the S&P 500 fell 0.5%, while Dow ended 0.4% lower.

Disappointing earnings helped to pull markets lower. Amazon shares fell 7% after posting revenue that was below consensus estimates. Meanwhile, Ford dropped 13% after posting a drop in quarterly profit.

Gold and oil benefit from Egypt

While stock markets fell on unrest in Egypt, oil and gold gained. Brent crude rose 2.1% on Friday to US$99.42/barrel, the highest level since October 2008. Meanwhile, gold futures added $21.90/ounce or 1.7% to $1,341.70/ounce.

Investors encouraged by US economic data

Early in the week, it was reported that US 4th quarter GDP grew 3.2%. Even though it was lower than the 3.5% economists expected, investors liked the composition of the growth. In addition, consumer sentiment rose in January.

Troubles continue in Europe

The Prime Minister of Ireland resigned as the leader of his political party this week, paying for his decision for Ireland to accept a bailout. 4th quarter GDP from the UK shocked markets this week, as it was reported to have decreased 0.5%, far worst than the expected growth of 0.5%.

Debt crisis spreads to Japan

While countries in the euro zone have frequently been downgraded by ratings agencies in recent months, Japan was downgraded by S&P this week, from AA to AA-. The country has a debt-to-GDP ratio of 181%.

Outlook for this week

Some market watchers see the turmoil in Egypt continuing for 2 to 3 weeks, pulling US markets lower. In fact, some expect a correction of 5% to 10%. I expect a correction of about 10%. With North American markets having made considerable gains since late August, markets have clearly run out of steam after poor earnings from companies such as Goldman Sachs, Amazon and Ford. The unrest in Egypt is likely the catalyst that will cause a correction. I wrote in a January 4th article on this blog that I expected a 7% to 15% correction for North American equities in the first quarter.

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