Monday, August 19, 2013

Market Week: August 19, 2013

The Markets

Investor pessimism ruled the markets for the second week in a row. Both bad news (downbeat announcements from retail and tech bellwethers Wal-Mart and Cisco, heightened turmoil in Egypt) and good news (lower-than-expected weekly new jobless claims) were followed by waves of selling. After struggling all week, the Dow gave up more than 200 points within an hour after U.S. markets opened on Thursday, which contributed to its worst week since June 2012. Renewed Fed fears also led to a surge in bond yields as prices fell. The benchmark 10-year Treasury yield spiked up 10 points on Tuesday alone and ended the week at a level it hasn't seen in more than two years.

Last Week's Headlines

Retail sales were up 0.2% in July. The Commerce Department said a 1% decline in car sales after strong gains during the previous two months hurt the overall sales figures. However, aside from car sales, other spending rose 0.5% for the month, and was 4% higher than the previous July.
Consumer prices were up 0.2% in July, much less than June's 0.5% increase. The Bureau of Labor Statistics said housing, gas, clothing, and food (mostly fruits and vegetables) were all up. Meanwhile, wholesale prices remained steady during the month after strong increases in May and June. July's numbers put consumer inflation over the last year at 2% and wholesale inflation at 2.1%.
After contracting for a year and a half--the longest recession of its almost 15-year history--the eurozone economy finally saw some growth. The gross domestic product for the 17 countries that make up the eurozone went from -0.3% in Q1 to 0.3% growth between April and June. As expected, Germany and France led the expansion, with 0.7% and 0.5% growth respectively, while the Spanish and Italian economies contracted more slowly than in Q1.
Though construction of new single-family homes slumped 2.2% in July, an increase in apartment building construction pushed up housing starts 5.9% for the month; according to the Commerce Department, overall new residential construction was almost 21% ahead of last July. Building permits also were up 2.7% for the month.
The manufacturing sector seemed somewhat stalled last month. The Federal Reserve's gauge of industrial production was unchanged in July, hurt by a 1.7% cut in output of cars and car parts and a 0.1% drop in overall manufacturing. The August Philly Fed manufacturing survey showed expansion for the third consecutive month, though growth was slightly weaker than the previous month, while the Fed's Empire State survey figure was relatively unchanged.
U.S. labor productivity rose at an annualized rate of 0.9% in Q2, the Commerce Department said. Workers worked 1.7% more hours, while output rose 2.6%. However, productivity was unchanged from the same quarter last year.
Not cleared for landing: The Department of Justice filed an antitrust suit against the proposed merger between American Airlines and US Airways. The suit alleges that the merger would create the world's largest airline and leave four airline companies in control of more than 80% of U.S. commercial air traffic. The suit said that would result in higher airfares and fewer choices for consumers, particularly those flying to and from Washington, D.C.
A decline in housing-related debt helped cut overall consumer borrowing by 0.7% in the second quarter. According to the Federal Reserve Bank of New York, that put consumer debt 12% below its Q3 2008 peak. The amount owed on auto loans has now risen for the ninth straight quarter, and Q2's increase was the biggest since 2006. However, only 5.7% of all household debt was more than 90 days overdue, down from Q1's 6.1%.

Eye on the Week Ahead

With low trading volumes that are typical of August and ongoing anxiety about future Fed actions, it might not take much news to move markets in either direction. Minutes of the last Federal Open Market Committee meeting could prompt further speculation about what could happen in September. Housing data also is on tap.

Key dates and data releases: home resales, Federal Open Market Committee meeting minutes (8/21); new home sales (8/23).

All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

Monday, August 12, 2013

Market Week: August 12, 2013

The Markets

With little fresh economic data and some hawkish hints from Fed officials about September's monetary policy meeting, equities traders seemed to have decided that last week was a good time to take some profits in the wake of record highs. After five straight positive weeks, the Dow industrials took a breather, while the S&P 500, Nasdaq, and Russell 2000 all had their worst week since the Federal Reserve laid out its blueprint for reducing its economic support.

Last Week's Headlines

U.S. service industries saw accelerating growth in July, according to the Institute for Supply Management's index, which soared to 56% from the previous month's 52.2%. Of the 18 industries that comprise the index, only mining and health care/social assistance experienced contraction.
Lower imports and higher exports cut the U.S. trade deficit by more than 22% in June. The Bureau of Economic Analysis said the $34.2 billion trade gap was the lowest since October 2009. Because the trade deficit is subtracted from gross domestic product calculations, the reduction could prompt an upward revision to the next estimate of second-quarter GDP. That estimate will arrive in late August, three weeks before September's Federal Open Market Committee meeting, at which the Fed will once again assess the strength of the U.S. economy.
The Bank of England said it plans to keep its key interest rate at 0.5% until the unemployment rate falls below 7% from its current 7.8%, which the BOE doesn't expect to happen before 2016. The central bank also increased its U.K. growth forecast for this year to 1.4% from 1.2%, and it now expects 2.6% growth in 2014 instead of 1.8%.
The Securities and Exchange Commission and the Department of Justice filed civil charges of fraud against Bank of America. The charges allege that in 2008, the bank sold $855 million in residential mortgage-backed securities without disclosing to all investors that more than 70% of the underlying mortgages--allegedly termed "toxic waste" by B of A's CEO at the time--were likely to become delinquent quickly.
Two major U.S. newspapers will soon become the property of individual owners. Amazon CEO Jeff Bezos announced he will pay $250 million of his personal fortune to buy the Washington Post newspaper from The Washington Post Co. In doing so, he joined Red Sox owner John Henry, who is buying the Boston Globe from the New York Times Co. for $70 million.
China's Customs Administration said that both imports and exports of the world's second-largest economy rose in July. Imports (one gauge of China's domestic consumption) were up almost 11% from a year earlier, while exports rose 5.1% over the last 12 months.

Eye on the Week Ahead

Retail sales may suggest consumers' state of mind, and investors will be watching to see if housing starts rebound from the previous month's sharp decline. Though inflation data is unlikely to see a dramatic change, any strong move upward could set off fresh fears about September's Fed meeting.

Key dates and data releases: retail sales, business inventories (8/13); wholesale inflation (8/14); consumer inflation, Empire State/Philly Fed manufacturing surveys, industrial production, international capital flows (8/15); housing starts, business productivity/costs (8/16).

Monday, August 5, 2013

Market Week: August 5, 2013

The Markets

Another week, another record close: Domestic equities once again probed record territory as economic data continued to be just good enough to encourage investors without provoking immediate tapering of the Federal Reserve's economic support. The S&P 500 set a fresh record after passing 1,700 for the first time, and the Dow and the small caps of the Russell 2000 also hit new closing highs. The Russell has now more than tripled since its March 2009 low, the Nasdaq isn't far behind, and the S&P and Dow have more than doubled over the same time.

Last Week's Headlines

The U.S. economy grew 1.7% during the second quarter. That's better than the previous quarter's 1.1% (which was revised downward from 1.8% based on the Bureau of Economic Analysis's most recent updating of the methodology used to calculate gross domestic product). Business investment that rose 9% and a 1.8% increase in consumer spending helped offset a 9.5% increase in imports, which are subtracted from GDP, and a 1.5% reduction in federal government spending. The GDP numbers will undergo two revisions over the next two months.
The unemployment rate fell to 7.4%, its lowest level since December 2008. However, the 162,000 jobs added to the nation's payrolls in July were far less than the 189,000 jobs averaged over the last year, and the Bureau of Labor Statistics said part of the unemployment rate's decline from 7.6% in June resulted from some discouraged workers leaving the workforce.
The Federal Reserve will keep buying bonds at its current pace. The announcement noted the recent increase in mortgage rates as a potential threat to economic conditions and called current growth "modest" (a slightly more pessimistic reference than the "moderate" language used in recent statements).
Average home prices in the cities tracked by the S&P/Case-Shiller 20-city index saw their strongest year-over-year increase--12.2%--since March 2006. May's 2.4% gain put home prices back at their levels of spring 2004, and the average price in two cities--Dallas and Denver--hit new all-time records.
U.S. manufacturers saw accelerating growth in July. The Institute for Supply Management's gauge of manufacturing activity rose from June's 50.9% to 55.4%--the highest reading of the year--and reports of new orders hit 58.3%.
Consumer spending rose 0.5% in June, according to the Commerce Department, while personal incomes were up slightly less. However, adjusted for inflation, incomes actually fell 0.1% instead of rising 0.3%, and the inflation-adjusted increase in spending was only 0.1%.
The European Central Bank left its key interest rate unchanged at 0.5%.

Eye on the Week Ahead

As earnings season begins to wind down, a dearth of economic data could allow equities markets to digest their recent gains. Also, public statements by the presidents of several of the 12 regional Federal Reserve banks could clarify the cases being made internally for and against tighter monetary policy.

Key dates and data releases: U.S. services (8/5); balance of trade (8/6).