After The Close - The final trading day of August, a month that was not particularly kind to those long equities, fittingly ended on a sour note. The major equity averages started the session in the red and extended those losses toward the final bell on light trading volume. Pressuring the equity market were rising concerns about the fractious Middle East, and the possibility that a U.S.-led response against Syria could push oil prices markedly higher. We also received a disappointing report on the U.S. economy in the form of data on personal income and spending for the month of July. These factors, along with ongoing concerns that the Federal Reserve will begin to step on the monetary brakes as early as next month, have investors worried and showing some resistance these days about adding more risk to their portfolios. At the closing bell, the Dow Jones Industrials, the NASDAQ, and the broader S&P 500 Index were off 31, 30, and five points, respectively, while the losses were more pronounced in the small-cap Russell 2000 and the S&P Mid-Cap 400 Index, to the tune of more than 1.5% on each. Overall, declining issues outpacing advancers by a notable margin on both the Big Board and the NASDAQ.
Overall, it was a difficult month for equities, with lingering concerns that the Federal Reserve will cut back on its bond-buying program the biggest culprit behind the selloff. For the month, the Dow 30, the NASDAQ, and the S&P 500 fell 4.4%, 1.0%, and 3.1%, respectively. A relatively solid showing from the technology stocks was the main reason why the losses recorded by the NASDAQ were not as severe as on the other major equity averages. It also was not a good month for the Russell 2000 and the S&P Mid-Cap 400 Index, reflecting the aforementioned reluctance by traders to add more risk to their portfolios. We did witness some more sector rotation over the four weeks, as investors reduced positions in the higher-yielding utilities, telecommunications, and consumer staples. With rates on fixed-income securities rising in recent months on the Federal Reserve worries, the higher-yielding equities have lost a bit of their appeal.
However, those high-yielding sectors actually held up relatively well during today’s session. Conversely, those groups most closely tied to the performance of the global economy were out of favor. The biggest laggards were the basic materials, financial, and industrial stocks. Our sense is that investors are worried that possible disruptions to the world oil supplies, especially with the civil unrest in Syria and Egypt, would weigh on the performances of the global economies. Speaking of Syria, the major equity indexes extended their losses today after U.S. Secretary of State John Kerry outlined Washington's case against Syria’s government in a deadly attack last week. Mr. Kerry condemned Syria’s use of chemical weapons, which many market participants took as a sign that U.S. may be moving closer to some kind of military action against the Assad regime. Shortly after those remarks, though, reports surfaced that President Obama hasn't made a final decision about military action against Syria, but appears to be considering a limited strike.
Nonetheless, the recent worries about the Middle East and the Federal Reserve’s next course of action regarding monetary policies have unnerved investors. In fact, after falling to an August low of 12.19 on August 6th, the S&P Volatility Index (or VIX), which is often referred to as the fear index, has been on a steady accent, finishing today’s session just shy of the 17.50 mark. We would not be surprised if the volatility persisted over the next few weeks ahead of the next two-day Federal Open Market Committee meeting (scheduled for September 17th and 18th) and with the continued civil unrest in the Middle East. Our sense is that some good news on the economy, which we will get a lot of during the upcoming holiday-shortened trading week, would be welcomed news for skittish investors. Next week will bring reports on manufacturing and nonmanufacturing activity, the trade gap, and employment. The condition of the labor market and the Federal Reserve’s latest Beige Book summation of economic conditions (due next Wednesday afternoon), may be used as a gauge by investors as to when the long-anticipated likely tapering of bond purchases may take place. Such monetary actions, if sizable, could prompt some further profit taking in the world equity markets. -William G. Ferguson
12:30 PM EDT - The U.S. stock market started out on a weaker note this morning, and has failed to rally in the ensuing hours. And, it remains to be seen if any bargain hunters will move in to support equities this afternoon. Notably, we are heading into a three-day holiday weekend, and that may keep some traders on the sidelines. As we pass the noon hour in New York, the Dow Jones Industrial Average is still off 42 points; the broader S&P 500 Index is lower by five points; and the NASDAQ, which is quite weak today, is down 25 points. Further, there is considerable weakness in the small and mid-cap issues, which suggests that there is little appetite for risk right now. Market breadth is quite negative, as decliners are outweighing advancers by 2 to 1 on the NYSE, and by an even wider margin on the NASDAQ.
All of the market sectors are in negative territory today, which indicates that there are few pockets of strength. The healthcare issues are trading lower, with sharp losses in the biotechnology names. Also, the consumer cyclical stocks are weak. In contrast, the basic materials issues, while still lower, are showing some relative strength. This group may be getting help from the chemical stocks, and the precious metals issues.
Technically, the S&P 500 Index is now about 5% below the 1,710 high reached in early August. By conventional standards, this move lower constitutes a normal pullback in an otherwise strong bull market. While difficult for traders, these periods of consolidation are necessary. For one, they can present more desirable entry points, and entice new or reluctant participants into the market, which can provide the fuel needed for another market advance. These periods of consolidation also tend to go hand in hand with some sector rotation. As different industries tend to do better, or worse, through the various stages of the economic recovery, this is reflected in the stock market.
Meanwhile, investors received limited economic news this morning. Personal income and spending for the month of July, more or less, matched expectations. The economy in the Chicago region is progressing as anticipated. Further, University of Michigan’s final reading on consumer sentiment in August came in at 82.1, a bit better than had been anticipated.
In the corporate earnings arena, Krispy Kreme (KKD) shares are faltering, after the doughnut seller put out disappointing results. - Adam Rosner
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
Stocks to Watch from The Survey – Corporate news is rather light ahead of the Labor Day holiday. Still, even with many investors away from their desks, there are a number of equities that will likely see active trading today. Indeed, the stock of Krispy Kreme Doughnuts (KKD) is down sharply ahead of the bell, after the restaurant operator reported disappointing July-period results. On the bright side, investors appear pleased with quarterly financials from retailer Big Lots (BIG) and salesforce.com (CRM), a leading provider of on-demand customer relationship management services. BIG stock is indicating a moderately higher opening this morning, while CRM is showing even more strength. Shares of Apache (APA) are also up nicely in pre-market trading, after the energy company agreed to sell a 33% stake in its Egypt business for $3.1 billion. – Matthew E. Spencer
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
Before The Bell - The nation's economy accelerated notably in the second quarter according to figures issued yesterday morning by the Department of Commerce. To wit, the government, which a month ago had reported a 1.7% increase in second-quarter gross domestic product (some had been forecasting growth of less than 1%), yesterday affirmed that its revised look at the period, based on more complete source data, had indicated a 2.5% gain in such output. (Expectations had been for growth of 2.2%.)
That positive revision, which came in part on an acceleration in export growth in the period and better figures on nonresidential fixed investment, along with a report showing a further downward trend in weekly jobless claims gave the economic bulls something to cheer about. It also gave the stock market a lift, as the leading averages jumped out to a nice early gain and equities didn't look back for the most part. In fact, the stock market, which had been pummeled on Tuesday, with the Dow Jones Industrial Average shedding 170 points, recouped a bit of that lost ground on Wednesday. Then, yesterday, the good GDP news, and an apparent delay in any military strikes against Syria by the United States, helped to push the Dow to an early gain of some 90 points. As was the case on Wednesday, though, it could not sustain those gains, and the uptick was pared back notably late in the session--especially on the aforementioned Dow. For the most part, however, the strength persisted and the bulls enjoyed a decent, if not exceptional, day. The advance on the NASDAQ was particularly strong, with that composite adding 27 points. The Dow's gain, though, was limited to 16 points, a much lesser percentage increase. Of note, there was late selling in some cyclical stocks, notably the oils, and in some basic industry groups.
As for the economy, the better GDP news and the drop in jobless claims, while supportive for the economy and likely to help sustain a better-than-2.0% rate of growth in the third and fourth quarters, could also serve to quicken the adoption of monetary tapering by the Federal Reserve. Specifically, the central bank might now be more disposed to slow down the rate of bond buying a bit before its targeted late-2013 move, even timing the start date to the September or October FOMC meetings. That possibility is likely what has capped the market's upward moves the past two sessions.
Meanwhile, even after the poor August for equities, the market is nowhere near undervalued, and can just generously be considered about fairly valued. Many groups are, in fact, trading at multi-year highs and capitalization rates are up decidedly from several years ago, even as earnings have trended higher, for the most part. The richer multiples, which are justified to a degree in a backdrop of low inflation, such as we now have, and modest competing bond yields, leave equities quite vulnerable should unforeseen negative surprises evolve, such as a heating up of the ongoing series of conflicts in the fractious Middle East. As such, the apparently more tentative approach to that region, in particular Syria, than appeared would be the case a couple of days ago, is probably behind the more upbeat performance on Wall Street the past 48 hours.
Overall, as noted, the stock market has retreated in recent weeks, amid worries about the Fed, Syria, and lingering uncertainty on the future direction of the economy and earnings. As such, investors remain on edge. Looking forward, now, the markets seem to again be in a supportive mood on our shores, especially as Great Britain, which had been expected to join the United States in any move against Syria, saw lawmakers over there defeat a government motion in support of military action. All told, and armed with data showing just slight increases in personal income and consumer spending for July, the equity indexes are suggesting a modestly higher opening at the outset of trading in less than an hour from now. – Harvey S. Katz
At the time of this article's writing, the author did not have positions in any of the companies mentioned.