It was a roller-coaster week on Wall Street as we saw up-and-down moves in response to everything from Janet Yellen’s Congressional testimony to the shooting down of a Malaysian airliner and Israel’s military move against Hamas. Throughout the week, we also saw mixed earnings reports as well as mixed economic news. Investors had to decipher what all of these cross currents meant for the broader stock market, which was no easy task. Thursday’s big selloff had bulls feeling skittish heading into the weekend, but we did get a solid Friday performance to close out the week on a winning note.
The Malaysian plane crash rattled global markets, and the subsequent responses from the U.S., Russia and a divided Ukraine left a lot of unanswered questions. The U.S. blamed Russia for the incident, Pro-Russian Ukrainians blamed Western Ukraine, and Russia denied allegations. Some news agencies wondered if it simply was an accident, while others questioned why a passenger jet was flying over a war-torn country in the first place. The stock market managed to shrug off Thursday’s losses, though, and Friday’s big bounce left the major indices with decent weekly gains of 0.9% for the Dow, 1.6% for the Nasdaq and 0.5% for the S&P 500.
The Obama Administration quickly mulled over new economic sanctions against Russia, and since Russia is a big energy supplier to Europe, we could see negative fallout if Russia were to escalate what some academics referred to as a “New Cold War” between the U.S. and Russia. It will be interesting to see how this “blame game” plays out, and it is definitely a concern for global financial markets. Friday’s stock market rally showed that concern levels remain in check, but again, this sort of “global shock” and the reactions to it can have unintended consequences that can quickly send equity markets into a nosedive.
Money flowed into “safe haven” U.S. Treasuries following the downing of the Malaysian jet, and we saw the yield on the 10-year Treasury fall below 2.50% this week and close at 2.48%. The Volatility Index (VIX) also reflected fear levels as it spiked as high as 15.38 on Thursday, but as calmer heads prevailed, the VIX slipped back down to head into the weekend at 12.06. This showed that fear levels had quickly subsided and that investors did not think the tensions between the U.S. and Russia would have much of an effect on global economies. Again, the strong Friday performance had the bulls breathing a big sigh of relief.
On the economic front, the U.S. showed yet more improvement in terms of weekly jobless claims, but we also saw a not-so-great Consumer Confidence number from the University of Michigan. July’s confidence level actually fell to 81.3, from June’s 82.5, which was also below economists’ expectation of an 83 reading. We continue to see mixed messages in terms of economic news, and that might make it more difficult for the stock market to justify further upside above these new or near-record levels for the Dow and the S&P 500 (or above the 14-year high for the Nasdaq).
Mid-July is historically a quiet, low-volume time of year, when most market participants are on vacation or at least planning one, but this one suddenly turned into a big-news, big-drama time of year. Janet Yellen’s targeting of social media, biotech and small caps as overvalued was big news, even though the rest of her testimony was typical Fed 101. She answered a lot of questions on Tuesday and Wednesday with the skill and deft of a Greenspan or a Bernanke, and overall she received positive reviews once investors got over the fact that the Fed is clearly watching the stock market and various sectors like a hawk.
The subject of asset “bubbles” came up quite a bit in Yellen’s appearance on Capitol Hill, and that subject is also coming up more and more from various Wall Street strategists. Yellen reiterated that it is not the Fed’s job to manage bubbles, but she also did not say a word about the Fed’s possible role in creating bubbles (housing, stocks, bonds etc.). These past five years of zero interest rates and all of the Treasury purchases from the Fed have to have inflated SOMETHING, and the worry is what happens to these possibly extended sectors once the Fed stops buying Treasuries at the end of October. Even more worrisome is what happens when the Fed finally begins to raise interest rates.
These are worries for another day, though, and bulls were just thrilled to have headed into the weekend with the major indices all up for the week. We are likely to have a challenging second half of the year, so stay rested and ready for anything. The Gorilla wishes each and all a relaxing summer weekend to recharge. After a volatile week like this one, those quiet summer trading days are looking very inviting. Let’s just hope earnings season can continue to shine and avoid those shortfalls, stay tuned, and again, have a great weekend!
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