Market Digest – Week Ending 8/7
Stocks declined along with commodity prices. Most market participants interpreted this week’s data to mean the Fed is increasingly likely to raise rates in September. On Tuesday, Federal Reserve Bank of Atlanta President Dennis Lockhart suggested rates should rise. A generally strong earnings season, falling commodity prices and a reasonably strong jobs report on Friday supported the notion.
S&P 500: 2,078 (-1.2%)
FTSE All-World ex-US: (-0.6%)
US 10 Year Treasury Yield: 2.16% (-0.03%)
Gold: $1,094 (-0.0%)
USD/EUR: $1.097 (-0.2%)
• Monday – Brent Crude dropped below $50 for the first time in six months.
• Monday – Puerto Rico missed most of a $58 million bond payment, its first default while it attempts to restructure about $72 billion in debt.
• Tuesday – Federal Reserve Bank of Atlanta President Dennis Lockhart said the Fed is close to being ready to raise rates. Stocks fell.
• Wednesday – The SEC voted 3-2 to enforce rules that companies must disclose pay gaps between CEOs and regular employees. The rule would increase transparency of compensation of both CEOs and employees at companies and is expected to be contested.
• Wednesday – The US trade gap grew by 7% in June to 43.8 billion as the stronger dollar reduced demand for exports.
• Thursday – Media stocks declined as Viacom reported a decline in earnings and a day after Disney reported subscriber losses at ESPN.
• Thursday – The first GOP debate left viewers divided over the performance of surprise early leader Donald Trump.
• Friday – The economy added 215,000 jobs in July with hourly earnings up just 2.1%. The numbers suggest the Fed remains on track for a rate increase in September.
Unless the market sells off meaningfully in the coming weeks, it appears most likely that the Fed will raise short term rates away from zero at its September 16-17 meeting.
Stocks appeared to fall this week in anticipation, but we’re not convinced that is the real reason. US earnings have generally been strong, but continued signs of weakness in the Chinese economy, a lack of momentum in Europe and declining commodity prices suggest the macro picture is cloudy.
Anecdotally, we’ve noticed some of the trendy sectors of the market have seen sharper declines in recent weeks. These include biotech, media and even Apple. Within tech as a whole, stock specific volatility has picked up. Strong operating performers like Facebook and Google are being rewarded but missteps like those at Twitter, Yelp and LinkedIn are being punished severely by the market.
We view the soft market as normal at this point in a bull market. Whether there is more room to run or the party is over will depend mostly on the global economy, not a small and well anticipated interest rate change. That said – a 50 basis point move could cause a spike in the dollar and some short term selling pressure.