It has been a strange month for the stock market to say the least. It has been a strange year as well, and looking back to January 2nd, the S&P 500 was at 2,058. We have zigged and zagged all year, and it has been confusing and frustrating for bulls and bears alike. The S&P 500 closed Friday down slightly at 2,104, which puts it slightly above its 50-day moving average of 2,097. Bulls were pleased to see the small rally this week that left the S&P 500 up 1.2% for the week and about 2.0% higher for the month, but it was not the kind of week that bulls thought might fire up buyers enough to get the major indices back toward their all-time highs.
With Greece and China on investors’ radars, equity markets remained tentative and on edge all month. Chinese stocks were down 14% for the month (the Shanghai Index), and even with its recent government-backed bounce, the Shanghai Index is still down nearly 30% from its June high. It is amazing to think that “when China sneezes, the rest of the world catches a cold,” but that seems to be an emerging theme for investors right now. The U.S. market did all right this week, though, and in addition to the S&P 500 gaining 1.2%, the Dow was up 0.7% and the Nasdaq gained 0.8% for the week. For the month of July, all three majors posted modest gains of 0.4% for the Dow, 2.9% for the Nasdaq and 2.0% for the S&P 500.
So for it being a modestly winning month, you would think that investor confidence would be higher right now. It is, and it isn’t, and that is the conundrum as we head into August. The historically volatile September/October time of year is also waiting in the wings, so it is easy to see why investors are acting so reluctant and timid. The GDP report this week that showed a 2.3% gain was a decent showing for growth, but it did come in below the 2.8% estimate. Many market strategists are saying that we are simply not seeing any signs of upside economic momentum, and the stock market has a hard time breaking out to new highs without upside fuel.
The earnings picture has been decent, but not all that great. Close to three-fourths of companies have topped earnings estimates, but there have been enough shortfalls among energy stocks, high-profile names and multinationals to keep enthusiasm for stocks on the back burner. The Chinese economy seems to be sputtering, which is also weighing on global investor sentiment. Throw into this mix the thought that the Fed could rasie interest rates as early as September, and it is clear why we are not seeing a more robust stock market. There are just enough “wild cards” out there to keep things tame, but at least we keep seeing those magical bounces just when things get unhinged.
Aside from China and Greece, the U.S. Federal Reserve is the biggest potential dealer of a “wild card.” It continues to lean toward rate hikes, and it has been years since we have seen a rate hike. The stock market and the economy could likely handle a rate hike or two just fine, but the question is whether investors and big institutions can handle a rate hike or two. A quarter point hike or a half-point rate hike could set in motion massive capital flows that could sort of take on a life of their own. The tricky part for the Fed is how it would react if global financial markets went into that “taper tantrum” that Alan Greenspan recently suggested.
The Fed has historically acted calm, cool and decisive when it has made interest rate moves, but it has been nearly seven years since the Lehman meltdown when the Fed really had to react on a day-to-day basis to any sort of crisis of that magnitude. This is why some Fed watchers are saying that the Fed might postpone any sort of rate hikes well into 2016. Why rock the “apple cart” if you can postpone those “inevitable” rate hikes well into the future? This is the big question that will loom over the stock market for the rest of the summer, so get ready for an interesting debate on this important issue.
Friday’s Consumer Confidence Report for July came in at 93.1 versus the 94.0 that economists had expected, which was down slightly from June’s 93.3. So again, that is not exactly the backdrop the Fed wants to see if it raises rates in September or even December for that matter. The Fed has said that it will remain “data driven,” and the data is continuing to show a fragile economy with sub-par growth, as well as a consumer sector that remains cautious at best. This promises to be an interesting August and a challenging September, so stay tuned as we see how this current environment unfolds.
That said, the Gorilla wishes each and all a restful August weekend. It has been a volatile year for the stock market, but it is impressive to see it holding up so well. We are still close to all-time highs for the major indices, and somehow the stock market has avoided any sort of dramatic drawdown, despite the many “global shocks” that hang like dark clouds. We will be back in action on Monday, so in the meantime, have a great weekend!
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