Can the Summer Rally continue into the Fall?
After another slow trading week, markets closed slightly down, with the S&P losing 0.50%, the Dow dropping 0.88%, and the Nasdaq losing 0.22%. With the S&P 500 edging close to another record high, you might be wondering how much higher markets can go in this ‘sugar high’ rally. We’ve been asking this question too, and while we typically dislike getting too much into technical analysis, we want to discuss a technical indicator that could shed some light on the answer.
When determining whether equities are approaching a peak or floor, many analysts turn to the Chicago Board Options Exchange Market Volatility Index (VIX), a measure of the volatility of S&P 500. Historically, the VIX has been an uncanny forecaster of market tops and bottoms; whenever volatility (as measured by the VIX) is low, the S&P has reached a decisive peak, and then fallen. Last week, the VIX hit a multi-year low of 13.45 (anything under 20 is considered low), and we believe that given the lack of economic support for further gains, equities could be poised for a pullback. Cutbacks in business spending, pressure on food prices, and a weak manufacturing sector mean that the domestic recovery is anything but guaranteed. Weak numbers from China and Europe indicate that our trading partners will be dealing with their own economic troubles for months or years to come. This leads us to believe that the summer rally is fundamentally driven by trader expectations around further global quantitative easing. Recent jawboning by Fed officials, European leaders, and EU central bankers is largely to blame for the recent rally.
So if there is a pullback, what could it mean? How much equities retreat and when they do so will depend on a number of factors, such as the murky global economic outlook, September Federal Reserve meeting, and upcoming elections. In terms of headwinds, we can expect the continued contraction of the European markets to present further challenges, as will a potential hard landing in China. On the flip side, investors could see a boost after the next FOMC meeting, as it looks increasingly likely that the Fed will undertake further quantitative easing. Much will also depend on what action legislators take to address the fiscal cliff. Although it is reasonable to expect an end to our summer market romance, we believe there will be many opportunities for growth further down the road.
To wrap it all up, please remember that short-term gyrations in the market are expected and usually have had little relevance to long-term investment performance. When markets pull back, it can sometimes feel like riding an elevator to the basement, but market losses are rarely evenly dispersed across all sectors. In every market environment there are investment opportunities to be had, and we strive to find those opportunities and putting them to work in our clients’ portfolios.
ECONOMIC CALENDAR:
Monday: Dallas Fed Mfg. Survey
Tuesday: S&P Case-Shiller HPI, Consumer Confidence
Wednesday: GDP, Pending Home Sales Index, EIA Petroleum Status Report, Beige Book
Thursday: Jobless Claims, Personal Income and Outlays
Friday: Chicago PMI, Consumer Sentiment, Factory Orders
HEADLINES:
Durable goods order rise in July. Overall, durable goods rose a seasonally-adjusted 4.2%, beating expectations of a 2.5% increase. However, excluding the volatile transportation category, long-lasting goods actually fell 0.4%, indicating that the manufacturing sector is still suffering. Core capital goods, products like computers, industrial machinery and steel, a key measure of business investment, fell 3.4%, a steep drop that indicates businesses are scaling back investment in the slow economy.
Unemployment claims rise by 4,000. The number of first-time unemployment beneficiaries rose last week to a seasonally-adjusted 372,000, showing that the jobs recovery remains modest and uneven. While hiring continues to improve, it grew more slowly in August than July.
New homes sales grew 3.6% in July. The gain in sales matches the two-year high the housing market reached in May, indicating that housing is recovering steadily. Although housing sales have leaped 25% in the last year, we are still well below the levels that economists consider healthy. One trend slowing housing sales is a relative lack of available new homes; inventory levels dropped in July to the lowest on record.
Spain in unofficial talks with Eurozone about bailout. Although they have not yet made an official bailout request, Spanish officials are negotiating with Eurozone leaders to have government debt purchased by the existing rescue fund and are asking the ECB to intervene in secondary markets to lower bond yields.
QUOTE OF THE WEEK:
"Nothing is predestined: The obstacles of your past can become the gateways that lead to new beginnings.” – Ralph Blum
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Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
Diversification does not guarantee profit nor is it guaranteed to protect assets
The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896.
The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indexes from Europe, Australia and Southeast Asia.
The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
The Housing Market Index (HMI) is a weighted average of separate diffusion indices based on a monthly survey of NAHB members designed to take the pulse of the single-family housing market. Each resulting index is then seasonally adjusted and weighted to produce the HMI.
The Pending Home Sales Index, a leading indicator of housing activity, measures housing contract activity, and is based on signed real estate contracts for existing single-family homes, condos and co-ops. The PHSI looks at the monthly relationship between existing-home sale contracts and transaction closings over the last four years. The results are weighted to produce the index.
The Chicago Board Options Exchange Market Volatility Index (VIX) is a weighted measure of the implied S&P 500 volatility. VIX is quoted in percentage points and translates, roughly, to the expected movement in the S&P 500 index over the upcoming 30-day period, which is then annualized.
The BLS Consumer Price Indexes (CPI) produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services. Survey responses are seasonally adjusted and weighted to produce a composite index.
The Conference Board Leading Economic Index (LEI) is a composite economic index formed by averages of several individual leading economic indicators, which are weighted to produce the complete index.
Google Finance is the source for any reference to the performance of an index between two specific periods.
Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
Past performance does not guarantee future results.
You cannot invest directly in an index.
Consult your financial professional before making any investment decision.
Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.
By clicking on these links, you will leave our server as they are located on another server. We have not independently verified the information available through this link. The link is provided to you as a matter of interest. Please click on the links below to leave and proceed to the selected site.
Can the ‘Stealth’ Summer Rally Continue?
After a very quiet summer week on Wall Street (half the traders must have been on vacation), markets closed up, consolidating the gains made since the June 4th low. Last week the S&P gained 1.07%, the Dow picked up 0.85%, and the Nasdaq gained 1.78%. Before getting into what transpired last week, let’s take a moment to reflect on how far we’ve come this year. The S&P has been positive eight weeks out of the last ten, has gained 11.79% for the year, and is up 25.44% since this time in 2011. Despite a rocky second quarter and concerns about a double-dip recession, the markets are actually performing well. We know it can be hard to maintain composure when markets hit turbulence, but overall equity performance is getting better.
Federal Reserve Chairman Ben Bernanke started off Monday with reassurances that broad market measures are still pointing towards a recovery. While he didn’t discuss monetary policy, we can be sure he recognizes that the economy isn’t out of the woods yet and is still prepared to take action if needed. Though the week was light on economic news, jobless claims turned up lower than expected and our trade deficit narrowed, indicating that the economy is doing better, overall. Markets ticked up after his remarks, continuing their quiet rally.
Analysts have been surprised by the stealthy summer rally, as corporate revenues are down and economic fundamentals are still lukewarm. One explanation for why stocks are moving higher despite weak market internals is that traders expect Fed action next month. The downside to this is that if the Fed disappoints, equities could tumble. As we get closer to the end of the year, we can also expect additional media focus on the impending fiscal cliff, the expiration of tax cuts, and deep government spending cutbacks due to kick in January 1st; if the federal government doesn’t develop a plan, it could definitely rein in any market gains for the year.
In short, let’s remain cautious about our summer ‘sugar high’ rally, and understand that there will likely be additional turbulence ahead as election season heats up, the Fed announces its policy plans, and investors turn to our leaders for decisive action.
ECONOMIC CALENDAR:
Tuesday: Producer Price Index, Retail Sales, Business Inventories
Wednesday: Consumer Price Index, Empire State Mfg. Survey, Treasury International Capital, Industrial Production, Housing Market Index, EIA Petroleum Status Report
Thursday: Housing Starts, Jobless Claims, Philadelphia Fed Survey
Friday: Consumer Sentiment
HEADLINES:
USDA revises crop estimates lower because of historic drought. The USDA reduced its forecasts for corn and soybean crops due to the impact of the drought on the Corn Belt. Analysts were shocked at the dramatic reduction, which is down 13% since 2011 and will strongly affect food and commodities prices later this year. Some analysts believe that overall food prices could go up by as much as 5% next year.
Mortgage rates remain above 3.5% for second week. Interest rates on fixed rate mortgages rose to 3.59% after dropping to an historic low of 3.49% two weeks ago. Interest rates tend to follow Treasury yields, and the increase in rates has followed positive economic announcements, which have reduced demand for Treasury securities.
U.S. trade deficit falls to lowest level in 18 months. The trade deficit fell in June, helped by a steep drop in oil imports and a modest increase in exports. Despite Europe’s troubles, exports to the Eurozone increased by 1.7%.
Unemployment claims fell to 361,000 last week, consistent with modest gains in hiring. Despite July numbers skewed by seasonal factors, the distortions seem to have stopped and the job market may have pulled out of its midyear slump. Although the job market is not healthy, the economy added 163,000 new jobs in July, the biggest increase since February.
QUOTE OF THE WEEK:
"Go the extra mile to acquire what you want to both attract and give away” Dr. Wayne Dyer
Share the Wealth of Knowledge! Please share this market update with family, friends, or colleagues. If you would like us to add them to our list, simply click on the "Forward email" link below. We love being introduced!
Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
Diversification does not guarantee profit nor is it guaranteed to protect assets The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896.
The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indexes from Europe, Australia and Southeast Asia.
The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
The Housing Market Index (HMI) is a weighted average of separate diffusion indices based on a monthly survey of NAHB members designed to take the pulse of the single-family housing market. Each resulting index is then seasonally adjusted and weighted to produce the HMI.
The Pending Home Sales Index, a leading indicator of housing activity, measures housing contract activity, and is based on signed real estate contracts for existing single-family homes, condos and co-ops. The PHSI looks at the monthly relationship between existing-home sale contracts and transaction closings over the last four years. The results are weighted to produce the index.
The BLS Consumer Price Indexes (CPI) produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services. Survey responses are seasonally adjusted and weighted to produce a composite index.
The Conference Board Leading Economic Index (LEI) is a composite economic index formed by averages of several individual leading economic indicators, which are weighted to produce the complete index.
Google Finance is the source for any reference to the performance of an index between two specific periods.
Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
Past performance does not guarantee future results.
You cannot invest directly in an index.
Consult your financial professional before making any investment decision.
Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.
By clicking on these links, you will leave our server as they are located on another server. We have not independently verified the information available through this link. The link is provided to you as a matter of interest. Please click on the links below to leave and proceed to the selected site.
Can the Dow Jones stay over 13,000?
Although the week started off slowly, markets experienced a couple of volatile trading sessions on Thursday and Friday with the Dow dropping more than 180 points on Thursday before surging more than 200 points on Friday with the release of some upbeat domestic economic reports. Overall, markets finished flat or slightly up with the S&P picking up 0.36%, the Dow edging just 0.16%, and the Nasdaq gaining 0.33%.
The Dow is back over 13,000.
Thursday’s downturn in equities was driven largely by Wall Street’s realization that European Central Bank emperor Mario Draghi has no clothes. Markets spun in reverse after Draghi failed to announce any measures to back up last week’s bold talk about saving the Euro at all costs. As we mentioned in the last update, there simply isn’t enough money in the European economy to bail out every periphery country. Until Eurozone leaders are willing to support EU-wide underwriting of bond purchases by the ECB, there isn’t much Draghi can do to back up his words.
Domestically, traders reacted very positively to Friday’s jobs report, which showed 163,000 new nonfarm jobs in July, beating expectations of 100,000 – meaning we’ve potentially avoided a double-dip recession so far. However, markets may be showing some irrational exuberance as the report held plenty of bad news as well. The labor force participation rate shrank, and small businesses continued cutting jobs last month; two factors which led to the rise in unemployment. For July, the unemployment rate ticked upward a notch to 8.3% from 8.2%.
A mediocre jobs report combined with a struggling manufacturing sector and slow business revenues means that the U.S. economy still has a long way to go before we can call it healthy. Add in the tax and regulatory threats coming down the pike in the form of Bush tax cut expiration and mandatory spending cuts, and we’ve got a recipe for trouble in the New Year. We hope Congress enjoys its five-week vacation and comes back refreshed and ready to deal with some serious issues before the November elections.
ECONOMIC CALENDAR:
Monday: Ben Bernanke Speaks 9:00 AM ET
Tuesday: Ben Bernanke Speaks 2:30 PM ET
Wednesday: Productivity and Costs, EIA Petroleum Status Report
Thursday: International Trade, Jobless Claims
Friday: Import and Export Prices, Treasury Budget
HEADLINES:
Retailers report strong sales in July. A combination of hot weather and clearance sales drew in American customers, giving retailers solid sales going into the back-to-school season. Retailers have been aggressive with promotions as the second-largest shopping season kicks off.
Long-term unemployed and discouraged workers numbers fell in July. Despite the increase in unemployment, the number of discouraged workers – those who have given up looking for work – dropped by 267,000 as compared to a year ago. The number of long-term unemployed workers – those out of work for 6 months or more – fell by 3.4% in July.
Consumer confidence rose in July. Despite lingering unemployment, Americans were unexpectedly optimistic about short-term business and employment prospects. Although respondents were concerned about rising prices, they expect to see more jobs in six months.
Wal-Mart’s stock surge means times are tough for low-income Americans. The retailer’s recent stock jump – to a record $74.80 on July 27 – and its strong earnings report could mean that low-income families are feeling the financial squeeze. Wal-Mart is planning to go after these consumers by lowering prices on food and consumables.
QUOTE OF THE WEEK:
‘Know that all the abundance you want is already here. You just have to tune it in’
Dr. Wayne Dyer
Share the Wealth of Knowledge! Please share this market update with family, friends, or colleagues. If you would like us to add them to our list, simply click on the "Forward email" link below. We love being introduced!
If you would like to opt-out of future emails, please reply to this email with UNSUBSCRIBE in the subject line.
Diversification does not guarantee profit nor is it guaranteed to protect assets The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896.
The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indexes from Europe, Australia and Southeast Asia.
The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
The Housing Market Index (HMI) is a weighted average of separate diffusion indices based on a monthly survey of NAHB members designed to take the pulse of the single-family housing market. Each resulting index is then seasonally adjusted and weighted to produce the HMI.
The Pending Home Sales Index, a leading indicator of housing activity, measures housing contract activity, and is based on signed real estate contracts for existing single-family homes, condos and co-ops. The PHSI looks at the monthly relationship between existing-home sale contracts and transaction closings over the last four years. The results are weighted to produce the index.
The BLS Consumer Price Indexes (CPI) produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services. Survey responses are seasonally adjusted and weighted to produce a composite index.
The Conference Board Leading Economic Index (LEI) is a composite economic index formed by averages of several individual leading economic indicators, which are weighted to produce the complete index.
Google Finance is the source for any reference to the performance of an index between two specific periods.
Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
Past performance does not guarantee future results.
You cannot invest directly in an index.
Consult your financial professional before making any investment decision.
Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.
By clicking on these links, you will leave our server as they are located on another server. We have not independently verified the information available through this link. The link is provided to you as a matter of interest. Please click on the links below to leave and proceed to the selected site.