July 18: Stocks Lack Momentum – Economic Highlights

With nothing major on the economic calendar today, stocks will likely struggle to make a clear directional move. The second quarter reporting season is off to a good start, but concerns about U.S. economic growth and Europe’s debt problems are holding the market back. The unresolved debt ceiling/budget debate in DC provides additional unsettling noise.

Europe released the results of its bank stress tests late on Friday, but it appears to have done little to reassure the markets about the banking sector. With only nine of the 91 banks tested failing to make the cut, the market does not appear to be convinced that the test was ‘stressful’ enough.

The issue is the appropriateness or otherwise of bank capital in the face of losses on sovereign debt holdings. The stress test showed total bank losses of €10.5 billion against an overall direct exposure of €687 billion to the debt of Greece, Ireland, Portugal, Spain, and Italy. The absence of a Greek default may have been the weakest aspect of the test’s design. But it is nevertheless a very useful exercise as it provides the market with a mountain of uniform data on what’s on the banks’ balance sheets.

On the earnings front, we got a solid EPS and revenue beat from Halliburton (HAL) this morning, while toy-maker Hasbro (HAS) came short of expectations. We have IBM (IBM) reporting after the close today, while a bunch of major banks and other financial services firms, such as Bank of America (BAC) and Goldman Sachs (GS), are on the docket for Tuesday.

Macro worries about growth and debt will continue to weigh on stocks even as we get solid earnings reports. The market needs to see some confirmation that economic growth in the back half of the year will be better than what we saw in the first half. Stocks are unlikely to reverse the recent sub par trend in the absence of such a development.