State of the Stock Market Analysis for the Week Ending July 31st, 2016 (July Ends on an Interesting Note 7-31-16) All You Need Is Jobs

Stocks closed out July on a mixed and quiet note, but overall, the month had the bullish camp smiling widely. The week was fairly flat, but for the month, the major indices hit a home run, with monthly gains of 4.2% for the Dow, 6.5% for the Nasdaq and 3.5% for the S&P 500. We have the Dow and S&P 500 hovering near all-time highs, and with Friday’s flat and mixed close, those new highs are still within striking distance in the days and weeks ahead. The Nasdaq is also close to its own all-time high, so we will keep a close watch on the Nasdaq.

The big disappointment on Friday was the dismal second quarter GDP report, which showed a measly 1.2% growth rate versus the 2.6% number that economists had expected. To add more insult to injury, the first quarter GDP rate was revised downward to 0.8% from the previous 1.1% growth rate, and as bad as 1.2% is, 0.8% is a whole lot worse. This sort of sub-1% number suggests that we are a whisker away from recession-type footing, so the jury is out as to where the economy and the broader stock market go from here.

The ongoing weak economic reports play right into the fact that the price of oil prices has dipped back down toward $41 per barrel and the yield on the 10-year U.S. Treasury is back down toward the 1.45% level. It is a strange dichotomy to have oil falling, money flowing into Treasuries AND the S&P 500 edging up to near an all-time high. Strategists and hedge funds are scratching their heads right now, and the culprit behind all of the confusion appears to be the central banks of the world. The “zero” or “negative” interest rate market is a new development, and there is a growing chorus of critics saying that it might not be the best road to follow after all of these years.

The problem is how to reverse course and RAISE rates if you are the Federal Reserve or a central bank. The U.S. Fed raised rates by a quarter point in December, and the stock market (S&P 500) fell by more than 10%. The S&P 500 has rebounded since then to where it is once again near all-time highs, but it raises the question as to whether the Fed would even want to risk shaking up markets with another small 25-basis point rate hike. The Fed will probably play it safe for the rest of the year, so we can probably count on no rate hikes until at least 2017.

The political picture in the U.S. is still a wild card now that both political conventions have concluded. There was very little talk about the stock market or financial markets, but it did seem as though both parties are negative on any new trade agreements, as well as some of the old ones like NAFTA. The negativity on trade agreements COULD become a market-moving trend, but for the time being, the stock and bond markets do not seem all that worried about the political cat fight we are witnessing between both parties and even within the two individual parties.

Earnings are still coming in mixed, and with the price of oil prices down of late, there is talk of the big oil companies like Exxon (XOM) and Chevron (CVX) possibly cutting their dividends. Ford Motor (F) had a rough earnings week as well, so it is clear that some sectors are not doing as well as tech kingpins like Microsoft (MSFT), Apple (AAPL) and Google/Alphabet (GOOG). We are at the half-way point for earnings season, so we will see how next week unfolds. The weak second quarter GDP number explains why earnings have been lackluster, so at least we have some clarity as to why the economy is still looking weak.

August is here, and we start a new trading month on Monday. There is no Fed meeting until September, so we will just have to sit back and see how the rest of earnings season turns out. We will also be keeping a close watch on the economic numbers since the Fed has promised it will remain “data driven” with regard to rate hikes. That said, the Gorilla wishes each and all a relaxing, final July weekend. We have about 100 days until the Presidential election, so remain ready for an exhausting race to the White House. Again, have a great weekend, and we will be back in action on Monday. Happy Summer to all!

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