It was an historic week for the U.S. stock market with the large-cap S&P 500 index closing above the 1,700 level for the first time. The market digested a flood of economic data with several reports coming in better than expected. The U.S. Q2 GDP estimate came in above estimates. The FOMC statement on Wednesday and the jobs data on Friday helped reassure investors that the Fed's QE program will remain in effect and the taper will likely be postponed. If that wasn't enough dovish comments from a fed governor on Friday helped boost equities. Widely followed shares of Facebook (FB) hit their IPO price of $38.00 a share on July 31st, which was 440 days from its IPO. The biggest milestone was the S&P 500 closing above 1,700. The index is up +1,000% in the last thirty years. It was June 19, 1983 when the S&P 500 first closed above the 170 mark. Year to date the S&P 500 is up +19.88%, the NASDAQ composite is up +22.19%, the Dow Industrials +19.49%, the Russell 2000 +24.78%, the Dow Jones Transportation average +25.3%, and the SOX semiconductor index is up +25.8%.
Housing data in the U.S. was mostly better than expected with pending home sales for June down -0.4% compared to estimates for -1%. The Case-Shiller 20-city home price index showed a +12.2% rise in May, which followed a +12.1% gain in April. Yet the weekly MBA mortgage index continues to fall with a -3.7% decline last week. This index measures mortgage applications for both purchases and refinancings and it's now at a two-year low. This past week marked its seventh weekly decline in a row and down 11 out of the last 12 weeks. Rising interest rates and thus rising mortgage rates is crimping demand for mortgages which will eventually results in fewer home sales. Currently home ownership has fallen to an 18-year low.
The Chicago PMI data improved in July with a rise from 51.6 to 52.3. This is the third month in a row we've seen this particular PMI above 50.0 (showing growth). The U.S. ISM manufacturing index surged from 50.9 in June to 55.4 in July. This was way above expectations and marked the best reading since June 2011. In the not so great category we saw the Conference Board's Consumer Confidence index slip from an upwardly revised 82.1 in June to 80.3 in July. It was the first drop in five months.
One of the biggest reports for the week was the advance Q2 U.S. GDP estimate. Analysts estimates were all over the place but overall the concentration of estimates seemed to be in the +0.5% to +1.0% growth rate. The Q2 number came in better than expected at +1.7%. Unfortunately, this bullish reading was offset by the Q1 GDP number being revised lower from +1.8% down to +1.1%. To meet the Federal Reserve's growth target for 2013 we're going to have to see Q3 and Q4 GDP growth average more than +3.0%. Odds of that happening are pretty much zero but the Fed keeps preaching that we'll see stronger growth in the second half.
Another big report was the jobs data. The ADP employment change report came out a couple of days prior to the BLS numbers and the ADP reported showed private job growth of +200,000 in July. This was above expectations for +188K. Economists had been expecting the nonfarm payroll number to come in at +185,000 but after the stronger ADP number analysts were starting to adjust their jobs estimate higher and by Friday morning many were expecting close to +200K. Unfortunately the U.S. government said nonfarm payrolls came in at +162,000 for July. They further revised May and June's job numbers down -26K. July's number was the lowest reading in four months.
Stocks initially dipped on the news but traders were ready to buy the dip since weak jobs growth means the Federal Reserve will stay on the sidelines and continue their QE3 program. With the jobs data we also saw the latest unemployment rate, which fell from 7.6% to 7.4%. Unfortunately, looking at the details behind both the nonfarm payroll data and the unemployment rate the data is bearish. The number of full time jobs is shrinking. Only a third of the new jobs created in 2013 have been full time jobs. The rest have all been part time jobs. That's because businesses are trying to prepare for Obamacare. The heavy cost of healthcare for full time employees is forcing many companies to cut hours and only hire part time workers. The only reason we saw the unemployment rate decline is because more and more Americans have stopped looking for work. That means the labor force participation rate continues to shrink. If you're not in the workforce then odds are your consumer spending is going to be hampered, which affects U.S. GDP growth.
People forget that we need about +150,000 new jobs a month just to keep pace with population growth from immigration and students graduating from school and joining the workforce. Sadly the last few years have seen job growth stagnant in the +150K to +200K range. The biggest reason our unemployment rate has fallen has been the dramatic drop off in the labor force participation rate. Friday's report also showed that the average hours worked and hourly wages both fell. That's a bearish signal for future hiring. Normally we want to see rising wages and a rising number of hours worked, which normally precedes an uptick in corporate hiring.
Based on Friday's numbers there were multiple analysts who adjusted their time table for the Fed to begin tapering QE and pushed the target date farther out due to our lackluster job growth.
Speaking of the Fed we did have a two-day FOMC meeting this past week. As expected the Fed left rates unchanged in the 0.0% to 0.25% range. Their official statement was also a nonevent. The Fed believes that the U.S. continues to see moderate growth. They remain concerned about long-term unemployment in the U.S. The Fed also pointed out that disinflation remains a risk to economic growth. The problem here is that disinflation, a slowdown in the rate of inflation or rising prices, could actually lead to deflation, which is when prices actually start to fall. Inflation is easier to fight than deflation so their statement would suggest the Fed will continue to stimulate the economy with their QE program. Just in case Wednesday's statement wasn't enough we saw St. Louis Fed President Bullard speak on Friday afternoon. Bullard said the Fed needs more data before they make any decisions on tapering. He also reiterated the Fed's concerns about inflation being too low and potentially leading to deflation. Bullard's comments suggested that the Fed may not make any moves in their QE program until early 2014.
We did hear good news out of Europe. The Eurozone said their manufacturing PMI rose from 50.1 to 50.3. Numbers above 50.0 indicate growth. Improving PMI numbers in Italy, Germany, and the U.K. all helped contribute to Europe's growth. Meanwhile the European Central Bank (ECB) left their key interest rates unchanged at 0.5%. The Eurozone unemployment rate was unchanged at 12.1%.
This good news was offset by disappointing retail sales figures out of Spain (-5.1%) and Germany (-1.5%). PIMCO's Mohamed A. El-Erian made an astute observation that issues in the Eurozone could come to a head in September following Germany's national elections.
Data out of Asia was mixed. Japan saw its manufacturing PMI data fall from 52.3 to 50.7. That's almost in negative (contraction) territory. Japan's NIKKEI stock market index had a volatile week with losses early in the week reversing with a big bounce on Thursday and Friday. China said its manufacturing PMI inched higher from 50.1 to 50.3. Granted this was the official state report so take it with a grain of salt. Economists had been expecting a number below 50.0, which would have meant contraction. Officially the Chinese government is still forecasting +7.5% GDP growth this year but recent comments from their commerce minister suggest exports for the second half of 2013 will come in below expectations.
After nearly two weeks of consolidating sideways in the 1680-1700 zone the S&P 500 finally broke out past resistance on Thursday as investors reacted to the better than expected manufacturing PMI numbers from China, Europe and the U.S. Traders were quick to buy the dip on Friday morning with prior resistance at 1700 acting as new support. For the week the S&P 500 index added +1.0%.
Technically the index looks bullish and poised to make a run towards 1720 and likely the 1740-1750 zone. Of course it is worth mentioning that we are in blue-sky territory with no official overhead resistance. The S&P 500 should find short-term support at 1700, 1680, and its 50-dma near 1650.
chart of the S&P 500 index:
The NASDAQ composite is up four days in a row and the rally has been accelerating higher. The index managed a +2.1% gain for the week and closed at new 13-year highs. The 3700 level could be short-term round-number resistance. Prior resistance near 3625 is likely short-term support. If the market were to really correct lower than a -5% pullback would mean a dip toward the 3500 level.
chart of the NASDAQ Composite index:
The small cap Russell 2000 index managed to rally to new all-time highs with a +1.0% gain for the week. Yet the $RUT remains below its multi-month trend line of higher highs. While the trend is certainly higher there is still a significant chance of a correction like the ones we witnessed in April and June.
The 1060 level seems to be immediate resistance. If that level breaks then 1080 and 1100 are the next likely resistance areas. Look for support at 1040, 1020 and the 1,000 mark.
chart of the Russell 2000 index
Economic Data & Event Calendar
The week ahead is a quiet one for economic data. The ISM services number will likely come in better than expected. If the trend for mortgage applications continues then the MBA mortgage index should decline again.
We're in the last remaining days of the Q2 earnings season but the impact from earnings will likely remain stock specific.
Economic and Event Calendar
- Monday, August 05 -
Eurozone services PMI
- Tuesday, August 06 -
- Wednesday, August 07 -
MBA mortgage index
- Thursday, August 08 -
Weekly Initial Jobless Claims
Bank of Japan's press conference
- Friday, August 09 -
wholesale inventory data
Additional Events to be aware of:
September - U.S. debt ceiling deadline
September - German elections
The Week Ahead:
Looking at the week ahead the path of least resistance is higher. Technically the situation is bullish. The major U.S. indices have all broken out from a multi-day consolidation phase. New highs for the large caps and small caps have been reaffirmed with new highs in the transports. Dow Theory investors should be happy.
Investors don't care about bearish seasonal norms or the lackluster earnings results and the disappointing trend for corporate revenues. The Federal Reserve remains on the sidelines. Worries about the Fed tapering their QE program should subside a bit. Instead of concerns about the Fed tapering in September the consensus seems to think it will be early 2014 now.
The fact that gasoline prices are up +12% in July, the fourth biggest increase in July on record, and the biggest rise in gas prices in July in eight years, does not seem to be causing any concerns about consumer spending.
The fact that mortgage applications have been plunging for several weeks in a row has not yet filtered through to slowing home sales. Logically fewer applications means fewer purchases. The problem here is the lag time between mortgage applications and actually closings and then reporting home sales data.
The fact that "smart money" has been selling stocks does not seem to be ringing any alarm bells for investors. Multiple sources have now reported that hedge funds and institutional traders have been selling stocks the last few weeks while retail traders (i.e. "dumb money") have been buying stocks.
The fact that the volatility index (the VIX) has fallen close to multi-year lows does not seem to be waving any warning flags for investors. Normally when the VIX gets exceptionally low it's a caution signal that traders are too complacent and that stocks could be near a top.
We had a relatively quiet week when it came to geopolitical risks. There seemed to be a slowdown in the headlines from Egypt, Syria, and the rest of the Middle East. Yet on Friday the White House said they were closing over 20 embassies in 18 countries across the Middle East and north Africa beginning today (Sunday, August 4th) due to a significant security threat. The embassies would be closed until further notice. The State Department issued a travel warning for Americans across the same area and the Arabian peninsula for the entire month of August. New information suggests that Al Qaeda and similar organizations are planning a new wave of attacks across the region. One would have imagined that Wall Street might react cautiously to these headlines regarding potential attacks, but no, the markets ignored them.
It would appear that the "there is no other alternative" investing strategy for stocks is all that matters on Wall Street right now.
New highs tend to beget more new highs. We are in the second half of the year and most mutual funds have underperformed the market. That's going to put pressure on fund managers to chase stocks higher. Yet this justification doesn't seem to mesh well with the recent reports I just mentioned about institutional traders selling the highs.
Looking out past this week the market could find trouble in September. Right now congress is in recess but they'll be back in September and the fight will be on to raise the U.S. debt ceiling again. If history is any guide then both the democrats and the republicans will push their brinkmanship to the edge of collapse before a deal gets done.
â€œThere is only one side of the market and it's not the bull side or the bear side, but the right side.â€â€“ Jesse Livermore