It was a strange week on Wall Street, as stocks rose sharply Monday and then faded hard and fast to a mid-Wednesday low that was looking precarious to say the least. The early week slide was set in motion with Tuesday’s surprise decision from China to devalue its currency, which was a “wild card” that few investors expected. We did get a Wednesday afternoon moonshot bounce, though, and Thursday and Friday managed to stay calm and cool enough for the stock market to close out the week to the upside.
Bulls were very happy to see Friday close out with a modest win, though, and that left all three of the major indices in positive territory, with weekly gains of 0.6% for the Dow, 0.1% for the Nasdaq and 0.7% for the S&P 500. Wednesday was looking bleak when the S&P 500 dipped down to 2,052, which was below its 200-day moving average of 2,062, but that magical rebound removed the S&P 500 from what was looking like a technical meltdown. The S&P 500 finished the week at 2,091, and that puts it just 4 points below its 50-day moving average of 2,091.
The Chinese devaluation was the catalyst for the downside move, but we did get enough positive economic data in terms of jobs and retail sales to keep bullish spirits afloat. Friday saw the August University of Michigan Consumer Confidence report come in at 92.9 versus the expected 92.8, and while that was down from July’s 93.1, it was still a decent-enough number to say that consumers are hanging tough. We also saw Industrial Production for July rise 0.6% versus the expected 0.4% rise. So again, that was another bit of positive economic news that showed the economy might not be all that weak.
The downside to positive economic news, however, is that it provides the rationale for the Fed to raise interest rates at its September meeting. Yes, the economy might be looking solid, but it is a whole other story as to what happens if and when the Fed begins to raise rates. The recent government jobs report was also cited by Fed watchers as showing that the jobs picture is clearly strong enough for the Fed to raise rates. But again, the question is how stocks and bonds will react when the Fed finally does raise rates for the first time in seven years.
Alan Greenspan has warned of a “taper tantrum” taking place once the Fed does raise rates, and given the “tantrum” we saw this week over a relatively small Chinese devaluation, we can only guess what global financial markets will do with an actual, formal quarter-point rate hike from the Fed. The Fed prides itself on not being “reactive” to financial uncertainties and events, but what will it do if it sees the Dow drop 1,000 or 2,000 points following a tiny, quarter-point interest rate hike? It would be highly unlikely that the Fed would suddenly reverse course and cut rates if there were a market meltdown, so that is why investors remain nervous about any sort of rate hike.
In addition to some of the positive economic news this week, we did hear Friday that there was a formal “bailout” for Greece in place for roughly $100 billion in aid that would allow Greece to put a Band-Aid on its debt woes. This added to Friday’s optimism, and it was likely another one of those “pluses” that helped the stock market close out the week to the upside. Worries about the Chinese devaluation had also subsided by Friday, so it was really not all that surprising to have the stock market slip back toward what still might be an “end-of-summer” rally.
Oil prices fell sharply this week, and for all of the positive economic news, seeing oil fall is worrisome. Many economic shocks and problems have historically been preceded by sharp declines in oil, and some strategists are warning that it could be disastrous if oil were to fall to $40 per barrel from its current level of $42.74. Whether the fall in oil is predicting a global GDP slowdown or some other global shock remains to be seen, and for that reason, we will continue to monitor the price of crude oil closely. Crude was down about a half of a percent Friday to close out the week near its weekly lows.
So as we head toward the second half of August, we will be watching the economic news and listening for any “heads up” from Federal Reserve member speeches. The Fed meeting takes place in mid-September, so we do have some time to see what sort of news comes in and whether any of the economic hotspots like China get hot again. In the meantime, we did close out a positive week with an up day on Friday, and that had bulls heading into the weekend in a good mood. That said, the Gorilla wishes each and all a wonderful August weekend, and we will be back in action on Monday. Have a great weekend!
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