For the week ending September 25, 2015, the Dow and S&P 500 both declined but managed to recover from a deep drop during Thursday’s session. The Dow dropped -0.43 percent for the week and the S&P 500 dropped -1.36 percent. In other news: Fed Chair Janet Yellen said the global economy will be able to withstand turmoil in emerging markets; GDP expanded at a 3.9 percent annual rate; manufacturing in China contracted at the fastest pace in over six years; and, the markets are concerned that Volkswagen is not the only automaker that manipulated U.S. emissions tests. Below is a recap of the markets for each day of the week.
The markets rose on Monday despite a big drop in existing home sales. Oil rose $1.50 to $46.50. The Dow rose 0.80 percent to 16,510; the S&P 500 rose 0.46 percent to 1967.
On Tuesday, the markets sharply dropped despite good news for housing from the FHFA house prices report. Oil dropped $0.25 to $46.25. The Dow dropped -1.10 percent to 16,330; the S&P 500 dropped -1.23 percent to 1,943.
The markets again dropped on Wednesday on a sub-50 contraction in China’s manufacturing PMI and a low 50 growth in U.S. manufacturing PMI. Oil dropped $1.50 to $44.75. The Dow dropped -0.30 percent to 16,270; the S&P 500 dropped -0.20 percent to 1,939.
The markets dropped on Thursday on mixed economic news (durable goods orders were soft; new home sales were very strong; very low level of jobless claims) but were able to recover much of the day’s loss by closing. Oil rose $0.25 to $45.00. The Dow dropped -0.50 percent to 16,674; the S&P 500 dropped -0.34 percent to 1,932.
On Friday, the markets were mixed on a good GDP report of 3.9% annual growth and soothing comments by Fed Chair Janet Yellen. Oil rose $0.50 to $45.50. The Dow rose 0.70 percent to 16,340; the S&P 500 dropped -0.05 percent to 1,931.
Equities end the week with a loss, with the biotech sector taking a big plunge. Comments from Hillary Clinton regarding price gouging by pharmaceutical companies led both the biotech and healthcare stock lower. While the Dow gained 0.70 percent on Friday, it ended the week down -0.4 percent; the S&P 500 ended Friday down fractionally, and the week down -2.9 percent. House Speaker John Boehner announced his resignation effective next month with little effect on the markets. Boehner’s resignation may avert a government shutdown planned by Republicans in protest to funding Planned Parenthood.
The turmoil in emerging markets won’t hurt U.S. economy, said Fed Chair Janet Yellen. The markets in the U.S. and Europe rose in response to Yellen’s statement, which brought a long needed calming effect to investors. Yellen also reiterated that a rate hike will occur this year barring any surprises. U.S. economic data on Friday (GDP and consumer sentiment) showed that the American economy expanded at a greater than expected rate in the second quarter, primarily due to gains in consumer spending and construction.
The U.S. economy expanded more than previously expected for the second quarter (the second straight upward revision). GDP rose at an annual rate of 3.9 percent (up from 3.7 percent reported last month). The rise in growth is attributed to consumer spending on services (healthcare and transport) and revised construction spending. This data supports the expectation of a rate hike this year.
China’s flash manufacturing PMI falls to a 6.5 year low. The preliminary Caixin manufacturing PMI fell to 47.0 in September (anything below 50 indicates contraction), a drop from 47.3 in August. The drop was mainly attributed to a drop in new orders and new export orders, suggesting domestic and external demand remains weak. The economic slowdown in China has prompted calls for additional stimulus measures from Beijing and the PBOC (China’s central bank). Barclays has slashed its growth outlook for China to 6.6 percent in 2015 (down from 6.8 percent) and 6.0 percent in 2016 (down from 6.6 percent).
Volkswagen’s cheating on U.S. emissions tests call into question the results of other European auto companies. Volkswagen has admitted to cheating on its emissions testing of its four-cylinder TDI diesel engines. A report by the International Council on Clean Transport (ICCT), the group that discovered the cheating by VW, has led the Transportation and Environment (T&E) organization (a European group) to believe that other European automakers (Audi, BMW, Mercedes-Benz, and Opel) might be selling cars with illegal levels of tailpipe emissions. At this time, none of the other implicated automakers have commented. The huge potential fines that would be levied has caused the markets to react negatively to the news.
The bottom line: as the market speculates on when a Fed rate hike will occur, U.S. economic data will still have to justify the action. Weakness in the manufacturing sector might not improve in time for an October hike (and perhaps not even for December); and, low inflationary pressures could cause a delay as well. The over 6.5-year low in China’s flash manufacturing PMI is also a concern with regard to the global economy (which the Fed is watching closely).
The focus next week in the U.S. will be on the employment situation report on Friday (which will impact the Fed’s decision for an October rate hike). Also of interest will be personal income and outlays, vehicle sales, and the ISM manufacturing index. Globally there will be a slew of September PMIs to watch. In addition, the focus will be on the following: UK (GDP); eurozone (EC Consumer and Business Confidence, Harmonized Index of Consumer Prices, Manufacturing PMI, Producer Price Index); Germany (Retail Sales, Unemployment Rate, Manufacturing PMI); China (Manufacturing PMI); and Japan (Industrial Production, Retail Sales, Tankan Survey, Manufacturing PMI, Household Spending, Unemployment Rate).
Year-to-date the markets are down: Dow -8.5%; S&P500 -6.2%; Nasdaq -1.0%.
The Markets for the past week were: DJIA down -0.4%; S&P500 down -1.4%; Nasdaq COMP down -2.9%.
Commodities (ETFs) for the past week were: Gold (GLD) up 0.55%; Silver (SLV) down -0.48%; Oil (OIH) down -3.01%; Dollar (UUP) up 0.88%; 30-year Bonds (TYX) rose 3 basis points to 2.96%.
The VIX this past week (a measure of market sentiment and volatility) rose to 23.62% reflecting the uncertainty of rate hike in October and continued concerns over the global economy.
To see what’s on the calendar for next week, go to the Econoday calendar.
The economic calendar for next week is full:
o Monday – Personal Income and Outlays, Pending Home Sales, Dallas Fed Mfg Survey
o Tuesday – S&P Case-Shiller HPI, Consumer Confidence
o Wednesday – EIA Petroleum Status Report, ADP Employment Report, Chicago PMI
o Thursday – Weekly Jobless Claims, Motor Vehicle Sales, PMI Manufacturing Index, ISM Mfg Index, Construction Spending
o Friday – Employment Situation, Factory Orders
If you’re trading options, it is suggested trading Put and Call Credit spreads for next week at 2.0 standard deviations or greater. Expect the price of the SPX to fall within 1809 and 2060 (2 standard deviations).
For more information about options, see the ‘Suggested Links’ below.