Week in Review: Volatile market responds to mixed economic, earnings news

U.S. economic news

U.S. home sales decline
Sales of existing homes in the United States slid by 5.1% in June, in the aftermath of a government tax credit program that ended in April. Year over year, existing home sales rose 9.8% in June. Housing starts also dropped 5.0% in June, to a seasonally adjusted 549,000, the U.S. Department of Commerce reported.

Weekly jobless claims rise
Initial claims for unemployment benefits jumped 37,000 to 464,000 in the week ended July 17. The four-week moving average, which smoothes volatility and can give a better view of the overall trend, rose 1,250 to 456,000.

Wages lag inflation for year
Weekly wages for U.S. workers failed to keep up with the pace of inflation over the past year, according to a report issued by the U.S. Department of Labor. Median weekly earnings rose to $740, from $734 a year earlier, an increase of 0.8%, while the Consumer Price Index climbed 1.8%.

U.S. and global corporate news

Caterpillar’s profits, sales pick up
Strong sales by industrial company Caterpillar drove a 91% increase in profits as dealers restocked their inventories of heavy machinery amid a pickup in demand for construction equipment in Asia and North America.

UPS delivers much larger profit
In an indication of a healthy resumption of economic activity, package shipper United Parcel Services reported a 90% rise in earnings and revenue growth of 13%, driven by Asian trade flows and a moderate U.S. economic recovery. UPS and its rival FedEx are seen as key barometers of international trade flows.

Ford’s new focus pays off
Automaker Ford reported a 13% increase in second-quarter earnings as its strategy to trim the number of cars and trucks it makes and to offer more features and charge higher prices paid off. A turnaround in Ford’s North American operations was key, as the group turned in a pretax profit of $1.9 billion, reversing an $899 million loss a year earlier. This was Ford’s fifth consecutive quarterly profit and its best earnings report in six years.

3M earnings rise
Manufacturer 3M posted a 43% rise in earnings as its sales rebounded to prerecession levels, benefiting from new products along with a growth in demand in emerging markets and in its niches in automotive manufacturing and consumer electronics.

Apple profit soars
Computer and consumer electronics firm Apple recorded a 78% surge in profit on very strong sales growth, including early sales of its iPad tablet computer and its latest version of the popular iPhone. Apple’s sales revenue for the quarter rose 61%.

Nokia hurt by smartphone competition
Nokia reported a 40% decline in second-quarter profit. The world’s largest mobile-phone maker had its hands full as rival Apple’s iPhone ate away at its market share in the high-end segment.

Roche profit jumps 58%
Swiss firm Roche Holding, the world’s largest maker of cancer medicines, reported a sharp rise in profits for the first half of its year because of healthy drug sales and robust growth in the sales of the company’s cancer-fighting drugs.

Xerox earnings jump 62%
Printer and copier maker Xerox posted a 62% increase in profits, surpassing expectations on improving demand in developing markets and from small and midsized businesses. The company reported growth in all business segments.

Global economic news

European bank stress test released
All eyes were on Europe this week, as the long-awaited stress tests for 91 European banks were released Friday. The stress test results were met with initial skepticism over whether they were rigorous enough, and the tests themselves may have failed to ease uncertainty about the health of the European banking industry. All but seven of the 91 banks passed the test. The seven included five Spanish banks, one German bank, and one Greek bank. This was better than the market’s expectation that about 90% of banks would pass, as reported in The Wall Street Journal. Banks that fail the test will need to raise money from investors or governments. Most observers believe the amount of capital raised will leave banks adequately funded.

Eurozone economic activity picks up
Activity picked up in both the manufacturing and service sectors in the eurozone, according to a survey by financial information firm Markit. The preliminary composite Purchasing Managers Index (PMI) rose to 56.7 from 56.0 in June. The manufacturing and services PMIs both rose and had been expected to decline. Meanwhile, the euro has risen about 8% against the U.S. dollar in recent weeks, reflecting increased confidence in this regional economy. However, the euro’s rise makes exports from Europe more expensive in global markets.

U.K. economy grows for third straight quarter
The U.K. economy grew 1.1% from the first to the second quarter this year, and it grew 1.6% when compared with the second quarter of 2009. This is the third consecutive quarter of U.K. economic expansion after a deep recession and the fastest pace of growth since the first quarter of 2006.

German business confidence hits three-year high
German business confidence turned strongly higher in July, registering a leap of 4.4 points to 106.2 in the Ifo compound index. Economists polled by Dow Jones Newswires had expected a decline to 101.5. Business confidence in Germany is now at its highest since 2007, and the increase in confidence was the greatest since German reunification in 1990.

Stay focused and diversified

In any market environment, we strongly believe that investors should stay diversified across a variety of asset classes. By working closely with your financial advisor, you can help ensure that your portfolio is properly diversified and that your financial plan supports your long-term goals, time horizon, and tolerance for risk. Diversification does not guarantee a profit or protect against loss.

The views expressed here are those of MFS®and are subject to change at any time. These views should not be relied upon as investment advice, as securities recommendations, or as an indication of trading intent on behalf of any MFS investment product. Individual securities mentioned are for illustrative purposes only and may not be relied upon as investment advice or as an indication of trading intent on behalf of any MFS product.

Securities discussed may or may not be holdings in any of the MFS funds. For a complete list of holdings for any MFS portfolio, please see the most recent annual, semiannual, or quarterly report.

Past performance is no guarantee of future results.

Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; Financial Times; boston.com.

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Market Week: July 19, 2010

The Markets

After inching forward most of the week, domestic equities were felled Friday by a combination of options expirations, a surprisingly negative consumer sentiment report, and lackluster economic data.

Market/Index	2009 Close	Prior Week	As of 7/16	Week Change	YTD Change
DJIA	10428.05	10198.03	10097.90	-.98%	-3.17%
NASDAQ	2269.15	2196.45	2179.05	-.79%	-3.97%
S&P 500	1115.10	1077.96	1064.88	-1.21%	-4.50%
Russell 2000	625.39	629.43	610.39	-3.02%	-2.40%
Global Dow	1984.48	1794.46	1788.16	-.35%	-9.89%
Fed. Funds	.25%	.25%	.25%	0 bps	0 bps
10-year Treasuries	3.85%	3.07%	2.96%	-11 bps	-89 bps

Last Week's Headlines

• The devil is in the details: Congress gave final approval to what is being called the most sweeping financial reform legislation since the Great Depression. The legislation is designed to help prevent problems that led to the 2008 financial crisis from recurring. However, much of its impact will be determined by regulations that will be developed over the next year or so.
• Consumer inflation fell 0.1% in June, putting the annual inflation rate at 1.1%. The Bureau of Labor Statistics said energy costs, which fell 2.9%, were responsible for most of the decline.
• Inflation at the wholesale level also fell in June, for the third straight month, according to the Bureau of Labor Statistics. The drop of 0.5% followed declines of 0.3% and 0.1% in May and April respectively. Prices for raw materials fell the most, by 2.4%. Most of the 0.5% decline in finished products resulted from a drop in consumer food costs, which fell 2.2%.
• Despite falling oil prices, the U.S. trade deficit grew almost 5% in May, according to the Census Bureau. Increased imports from China accounted for a large part of that; the deficit with China alone rose more than 15% from April's figure. Though exports rose, imports rose even more.
• Retail sales were down for the second month in a row in June, according to the Commerce Department. However, if auto and gas sales are excluded from the total, sales actually rose 0.1% instead of falling 0.5%.
• The Federal Reserve Board lowered slightly its estimate of U.S. growth for the rest of the year to 3%-3.5% instead of the previous 3.5%-3.7%. Translation: don't look for higher interest rates in the near future.
• The Thomson Reuters/University of Michigan index of consumer sentiment fell dramatically in July, from 76 in June to 66.5. That's the lowest level since last August.
• Goldman Sachs agreed to pay $550 million to settle civil charges of fraud filed by the SEC. The company, which reported net earnings of $3.46 billion in Q1 2010, admitted its marketing materials for the securities in question "contained incomplete information." According to the terms of the settlement, $250 million will go to injured investors and $300 million to the U.S. Treasury. Goldman also agreed to review its business practices and training of employees.

Eye on the Week Ahead

Housing data will indicate the extent to which the first-time homebuyer's tax credit accelerated purchases. Second-quarter earnings reports from several consumer and tech bellwethers also are on deck, as are the results of the stress tests on European banks, scheduled to be released Friday. Finally, Fed Chairman Ben Bernanke will testify before Congress about the state of the economy.

Key data releases: Housing starts (7/20); home resales, leading economic indicators (7/22).

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