State of the Stock Market Analysis for the Week Ending August 2nd, 2014 (Can We Just Forget This Week in the Stock Market? 8-2-14)
Can We Just Forget This Week in the Stock Market? It was one of those weeks that the bulls would like to forget. Nothing seemed to play out well, and the market vibe that started out the week flat, tailed off quickly and sent us lower straight into Friday’s close. There was good news and there was bad news, but the negatives took the lead and led stocks downward as we ended up with weekly losses of 2.8% for the Dow, 2.2% for the Nasdaq and 2.7% for the S&P 500. Bulls had been hoping for a Friday bounce, but that unfortunately was not in the cards.
Many bulls thought that the impressive 4% GDP number we saw early this week would have fired-up the stock market, but that was not to be the case. We instead saw mixed earnings news and mixed economic news, and the broader market just shrugged and remained somewhat sedated. Throwing in the Argentinian government default, the ongoing tensions in the Middle East, Russia and Ukraine, and worries about inflationary pressures in the U.S., and you can see why the U.S. stock market could not get out of bed this week.
Following the big decline of more than 300 points for the Dow on Thursday, most bulls were worried about an old-fashioned Friday meltdown. A bad jobs report might have been the perfect trigger, but that was not to be the case, as we saw 209,000 new jobs versus the 235,000 that economists had predicted. That was down a bit from June’s 298,000 (revised upward from 288,000), but it was still a solid enough number to keep things from unraveling in the stock market. Unemployment levels rose to 6.2% from last month’s 6.1%, but that was likely the result of more people looking for work than the result of layoffs.
The other good news we saw on Friday was the ISM Manufacturing Report that came in at 57.1 versus the 56.0 reading analysts had expected. That number topped last month’s 55.3, and it suggested that the broader economy is alive and kicking. It also was a supportive number of that red-hot, second-quarter 4% GDP number this week. As great as these economic numbers were this week, though, they somehow were perceived negatively. The worry was that the stronger the economy is, the faster and sooner the Fed will raise interest rates.
At its meeting this past Tuesday and Wednesday, the Fed did a great job coming across neutral and not committing to any action in particular. It reiterated that its Treasury purchases would still end in October, but it remained hesitant on any hint that rates would begin rising anytime sooner than mid-2015. The Fed admitted seeing strength in many parts of the economy, but it said that the employment market was still showing signs of “slack,” and that was enough to alleviate any fears of interest rate hikes anytime soon.
So while all of the economic news was essentially good this week, the stock market still took it on the chin and finished lower. This was likely the result of global events in the Middle East, Russia, Ukraine and Argentina. There are many cross-currents and confusing events taking place right now, and global financial markets are having a difficult time making sense of them. The ongoing sanction battle against Russia has financial markets on edge, mainly because a trade or currency war would not be all that great for the ongoing global recovery.
Likewise, if we saw a spreading of those defaults to other countries like the ones we have seen in Portugal and Argentina, we could see more downside in global stock and bond markets. We closed out July in a negative mood, and we started August with more of the same. What we need to see now is confidence from governments and banks (and no more defaults), as well as a continued improvement in those economic numbers (like 4% GDP). That will help us get through what could be a tough August.
This bull market is now pushing six years old, and that is quite extended from an historical perspective. That is why bulls remain cautiously optimistic, and that is why we are ready for whatever the financial world throws our way. That said, the Gorilla wishes each and all a relaxing August weekend. We are entering that rough time of year, when anything can happen. So, get some rest and we will be back in action on Monday. This promises to be an interesting and challenging autumn season!
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