Week in Review: Stocks under pressure amid signs that recovery is losing momentum

U.S. economic news

Bernanke pledges Fed to do all it can to ensure recovery
U.S. Federal Reserve Board Chairman Ben Bernanke said Friday that the U.S. central bank "will do all that it can" to ensure economic recovery continues. He outlined steps the Fed might take if the economy slows. In his opening remarks to the world's central bankers in Jackson Hole, Wyoming, Bernanke said the Fed is prepared to provide additional monetary accommodation through unconventional measures if necessary.

GDP grows more slowly than thought
The U.S. economy grew more slowly that initially estimated in the second quarter and corporate profits nearly dried up. Gross Domestic Product rose from April through June at an annualized seasonally adjusted rate of 1.6%. A month ago, the government estimated the rate at 2.4% after a 3.7% expansion in the first quarter. After-tax earnings rose 0.1%, off the previous quarter's 11.4% gain.

Weak durable goods orders, drop in home sales show recovery losing pace
Weakness in durable goods orders and a drop to historic lows in new-home sales offered more signs that the economy is losing momentum. Durable goods orders rose 0.3% in July from June, mostly on the back of an increase in aircraft orders. Excluding the volatile transportation sector, orders tumbled 3.8%.

Also this week, reports showed that sales of new single-family homes fell 12.4% in July from June to a seasonally adjusted rate of 276,000, the lowest level since the data series began in 1963. Many purchasers seem to have left the markets since the expiration on April 30 of a federal tax credit for homebuyers. Existing home sales suffered a similar decline, dropping a record 27.2% to their lowest level in 15 years, as inventories soared to their highest level in more than a decade. Adding to the discouraging news were reports by the Federal Reserve Bank of Kansas City that manufacturing activity in the district stalled.

Initial jobless claims decline more than expected
More encouragingly, initial jobless claims declined by 31,000 to 473,000, more than the 10,000 drop predicted by economists. However, new claims for the previous week were revised upward, and the four-week moving average rose to the highest level since November 2009.

U.S. and global corporate news

Toyota Motor announced it will recall about 1.13 million Corolla and Matrix cars for an engine defect that U.S. regulators said could cause stalling. The recall will affect model years 2005 to 2008 in the United States and Canada and comes after three reported accidents linked to the defect. GM will recall approximately 200,000 of the Pontiac Vibe, which was designed and engineered by Toyota and built alongside the Matrix at a joint manufacturing plant in California.

Johnson & Johnson pulled two hip-repair implants off the market because of quality problems. That recall, administered through J&J's DePuy Orthopaedics unit, came the same week that J&J's Vision Care unit withdrew about 100,000 boxes of contact lenses sold in Asia and Europe because of a manufacturing problem.

Spirits giant Diageo reported its net profit rose 1.5% for the year ended June 30. Sales increased 5% but were up only 2% when stripping out the effects of currency fluctuations, acquisitions, and disposals. During the fiscal year, Diageo benefited from an 11% jump in organic net sales in emerging markets, including China and India, but suffered a 2% sales decline in the developed world.

Global economic news

U.K. economy expands 1.2%
The U.K. economy expanded 1.2% in the second quarter, marking its biggest growth spurt since 2001, as companies rebuilt inventories and construction work surged.

Standard & Poor's downgrades Ireland; Fitch upgrades Rwanda
Standard & Poor's Ratings Services cut its long-term sovereign credit rating on Ireland one notch to AA-. The company said the projected fiscal cost to the Irish government of supporting the financial sector has increased significantly above prior estimates. Ireland's banks were hit by the property market crash; as a result, the Irish government was forced to pump billions of euros into the banks.

Meanwhile, Fitch Ratings upgraded Rwanda, citing the African nation's "strong growth" and an improvement in its business environment. It noted that the country has posted an "uninterrupted" period of strong economic growth that has more than doubled its per capita income since 1994, when genocide killed some 800,000 people. The rating was upgraded to B, five steps below investment grade.

Japan's exports rise, albeit at a slower rate
Japan's exports rose in July for the eighth month in a row as sales of products, such as cars and electronic components, in emerging markets were still solid. However, the rate of growth slowed for the fifth month in a row. That pace is expected to slow even more if the yen, which this week surged to a 15-year high against the dollar, continues to appreciate.


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.

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

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