For the week ending July 31, 2015, the markets rebounded from their prior week’s loss despite reports of a slowing economy. The Dow ended the week up 0.70 percent, and the S&P 500 ended up 1.20 percent. In other news: the FOMC announcement appeared slightly hawkish giving an edge to a September rate hike; the U.S. economy is growing at its slowest pace since World War II; the rate of homeownership is at its lowest level since 1967; and U.S. salaries grew at the slowest pace since 1982. Below is a recap of the markets for each day of the week.
The markets were sharply down on Monday as China’s Shanghai Composite plunged -8.5 percent overnight. Oil fell $1 to $47. The Dow dropped -0.7 percent to 17,440; the S&P 500 dropped -0.58 percent to 2,068.
On Tuesday the markets rallied despite soft economic news (Case-Shiller; consumer confidence). Oil rose $0.75 to $47.75. The Dow rose 1.1 percent to 17,630; the S&P 500 rose 1.24 percent to 2,093.
On Wednesday the markets rose again on positive statements from the FOMC about the jobs market and housing sector. Oil rose $1 to $48.75. The Dow rose 0.7 percent to 17,751; the S&P 500 rose 0.73 percent to 2,109.
The markets were fractionally mixed on Thursday on a lower than expected GDP of 2.3 percent (2.5 percent expected). The Dow dropped fractionally to 17,745; the S&P 500 remained flat at 2,109.
On Friday the markets were pulled lower by energy shares. Oil dropped $2 to $46.75. The Dow dropped -0.3 percent to 17,690; the S&P 500 dropped -0.23 percent to 2,104.
The markets rebounded this week partially offsetting losses from the prior week. Weak wage growth will likely lead to lowered corporate earnings during the next earnings cycle. The data on earnings show: for the second quarter, 73 percent of the 354 companies that have reported show earnings above the mean estimate with 52 percent showing sales above the mean estimate; earnings growth declined -1.3 percent, the lowest since third quarter 2012 (-1.0 percent); earnings guidance for third quarter 2015 has 44 companies with negative EPS guidance and 18 companies with positive EPS guidance; and, the current 12-month forward P/E ratio is 16.6, which is above the 5-year average (at 13.9) and the 10-year average (at 14.1). Earnings estimates have been lowered by analysts for the last three quarters, with estimates for the third quarter down -1.5 percent.
According to the new government model, the U.S. economy grew more slowly than previously estimated from 2012 to 2014. During this period, the average growth rate of the economy (GDP) is now 2 percent (instead of 2.3 percent). The new model for calculating GDP is suppose to correct flaws in the old model; specifically, military outlays and consumer services spending, and how certain taxes and social benefits are categorized. The changes are welcomed by economists and investors who consider them long overdue. Under the new model, U.S. growth in 2012 dropped to 2.2 percent (from 2.3 percent); growth in 2013 dropped to 1.5 percent (from 2.2 percent); and in 2014 growth remained unchanged at 2.4 percent.
Homeownership has dropped to its lowest level since 1967, according the Census Bureau. The current homeownership rate for the second quarter is 63.4 percent (down from 63.7 percent in the first quarter). Housing experts are expecting the rate to continue to fall, hitting a record low established in 1965. Despite an improving job market and bull market, many would-be homeowners are still struggling in the aftermath of the Great Recession, with wages stagnant for the middle-class. During the boom years in real estate, the homeownership rate hit a peak of 69.2 percent in 2004.
U.S. wage growth increased just 0.2 percent in the second quarter, the smallest increase since 1982, and a big drop from 0.7 percent in the first quarter. The Bureau of Labor Statistics (BLS) measures total compensation, which is not only salary and hourly wages, but also employer spending on benefits. The largest factor affecting wage growth appears to be benefit spending, which only increased 1.4 percent for the year versus 2.2 percent for wages and salaries.
The bottom line: the economy continues to just putter along. It is still uncertain as to when a Fed rate hike will occur: either September or December, but the hawkish statement in the last FOMC announcement gives a slight edge to September.
The focus next week in the U.S. will be on manufacturing (manufacturing PMI, ISM manufacturing index, factory orders); housing (construction spending); the consumer (personal income and outlays, motor vehicle sales); and the economy (ADP employment report, employment situation). Globally the focus will be on the Bank of England which will release a slew of key reports (for the first time) along with its policy decision on Thursday. In addition, the focus will be on the following: UK (BOE monetary policy meeting, BOE quarterly inflation report, manufacturing PMI, services PMI, industrial production, merchandise trade); eurozone (manufacturing PMI, producer price index, services & composite PMI); Germany (manufacturing PMI, services & composite PMI, manufacturing orders, merchandise trade); China (manufacturing PMI); and Japan (manufacturing PMI).
Year-to-date the markets are mixed: Dow -0.7%; S&P500 +2.2%; Nasdaq +8.3%.
The Markets for the past week were: DJIA up 0.7%; S&P500 up 1.2%; Nasdaq COMP up 0.8%.
Commodities (ETFs) for the past week were: Gold (GLD) down -0.40%; Silver (SLV) up 0.43%; Oil (OIH) up 0.58%; Dollar (UUP) down -0.08%; 30-year Bonds (TYX) dropped 4 basis points to 2.93%.
The VIX this past week (a measure of market sentiment and volatility) dropped to 12.12% due to positive statements by the Fed on the 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 – Motor Vehicle Sales, Personal Income and Outlays, PMI Manufacturing Index, ISM Mfg Index, Construction Spending
o Tuesday – Factory Orders
o Wednesday – EIA Petroleum Status Report, ADP Employment Report, International Trade, ISM Non-Mfg Index
o Thursday – Weekly Jobless Claims
o Friday – Employment Situation
If you’re trading options, it is suggested trading Put Credit spreads for next week at 1.75 standard deviations or greater. Expect the price of the SPX to fall within 2038 and 2171 (2 standard deviations).
For more information about options, see the ‘Suggested Links’ below.