Thomson Financial: Quarterly American Summary, 2006


U.S. – 2Q 2006 Commentary

After a strong, steady rise in the first quarter, stocks were buffeted in the second quarter as worldwide political tensions rose, crude oil passed $75 per barrel, and two quarter-point rate increases came from the Federal Reserve under Chairman Benjamin Bernanke. The DJIA rose only 0.37%, never recovering from a steep drop off in early May, while the Nasdaq tumbled 7.17%, and the S&P 500 edged down by 1.90%.  Overall, the Energy sector surged, while Basic Materials shares edged up. Technology stocks, meanwhile, witnessed the steepest declines.

Chairman Bernanke, who was appointed in February, unwittingly contributed to the volatility of the market as investors adjusted to his speaking style. His mention of possible inflationary pressures in May, seemingly contradicting an earlier statement, sent Wall Street on a downward trend. However, by the end of the quarter the Fed had behaved as expected, with two 25 basis-point hikes in the key rate to 5.25%. The UK and European central banks kept their rates steady, and, along with Asia, are also keeping their eyes on inflationary pressures.

The various sectors of the economy reacted to the uncertainty around them with lowered performances across the board, save for Basic Materials (up 0.04%) and Energy (up 3.94%). Healthcare dropped 5.16%, as Merck contended with unfavorable court decisions about Vioxx. Pfizer’s revenue figure missed estimates, while other earnings reports in mid-spring were generally good. Staples dropped less than a point on good earnings reports from Coca-Cola, Altria, and Whirlpool. Financial shares ebbed slightly on interest rate fears; although, major investment banks reported excellent quarterly earnings. However, the bellwether of the Nasdaq, technology stocks, suffered a decline of over nine percent amidst executive-suite changes (most notably Bill Gates leaving the daily management of Microsoft), mixed earnings reports, and litigation and regulatory issues. Investors began to back off on Apple, after the new iPod development was slowed, and consumers cut down on spending on electronics as gasoline prices started to strain budgets.

The energy sector started the quarter strong, as oil prices surpassed $75 per barrel. Worries about the nuclear prospects of Iran, mixed industry earnings reports, and a shipping channel accident in Texas conspired to keep prices in the $70 range. Furthermore, investors continued to worry about the impact higher energy costs on consumer spending and business profits could have on the economy this summer and further out.

Official statistics, while on the whole positive, sometimes added to unease on the Street. Housing starts were mixed, while home sales rose. The CPI climbed slightly and personal incomes edged upwards, but the PMI ebbed. Retail sales went up, and the federal trade deficit started to decrease. Meanwhile, economic growth surpassed the initial GDP reading.

M&A activity continued at a strong clip in the U.S. and abroad, and the quarter ended with the biggest potential merger in Canadian history as Phoenix-based copper mogul Phelps Dodge made a US$40 billion bid for Canadian nickel miners Inco and Falconbridge. Elsewhere, telecom’s Lucent was acquired by Alcatel, and Mittal Steel bought Arcelor; Berkshire Hathaway snapped up 80% of Israel’s Iscar. American deals included the acquisition of Aviall by Boeing, Wachovia’s purchase of Golden West’s Financial Corp., a swap of several businesses between J.P. Morgan and the Bank of NY, and the merger of Thermo Electron and Fisher Scientific.