Stock prices declined for the fourth day in five on Friday, with the Dow Jones Industrials down 70 points (0.4%) on top of Thursday’s 317-point (1.9%) decline. For the week, the Dow lost 467 points or 2.8% – its worst showing since January – as compared with 2.7% for the S&P 500 and 2.2% for NASDAQ.
Stock market volatility remained at Thursday’s 4½-month high of 17 on the VIX scale on Friday. Volatility was especially evident in the internet/social media space, and not all of the moves were negative. Twitter was up more than 15% for the week, despite declines of 2.4% on Thursday and Friday. LinkedIn rose nearly 14% for the week, ending the week with gains of 4.2% on Wednesday and 11.7% on Friday, sandwiching a loss of 3.6% on Thursday. Facebook shares fell 3.8% for the week.
The S&P 500 was higher in early trading Friday, fell to the day’s lows at noon (when it was down 0.7%), climbed back into positive territory at around 2:00, and finished the day down 0.3%. July was the first negative month for stock prices since January, and the first trading day of August suggests that there may be some sustainability in the downtrend.
The prime movers of the stock rally this year, easy Federal Reserve monetary policy, the prospect of a more robust second-half economy, and better corporate profits, all took some hits this past week. The former was undermined by the Q2’s 4% GDP growth rate and some modest improvement in the language in the Fed’s assessment of the economy; the second by Friday’s equivocal readings on last month’s employment, unemployment and wages; and the latter by some disappointing corporate earnings reports, e.g., Exxon’s poor oil production numbers.
Friday was a busy day for economists, with jobs, consumer spending and manufacturing reports on the docket. On balance, the first data releases of August were positive, in our view.
209,000 net new jobs were created in July, the sixth month in a row with more than 200k new jobs (average = 244k). While the rate of job creation missed Street estimates centered on 230k, July’s total was still respectable, and the prior two months’ data was revised higher by 15k.
The unemployment rate ticked up to 6.2% last month from a low of 6.1% in June, but it rose for a good reason, 329k more people entering the labor force.
Average hourly earnings were basically flat last month, holding the 12-month change in wage rates to 2.0%, no better than the average since the recession ended in 2009.
Pretty much as expected, personal income and consumer spending increased 0.4% in June, 0.2% after inflation. Spending on goods was robust, offsetting softness in services. The 12-month rise in consumer prices increased from 1.2% in Q1 to 1.6% in Q2, moving in the direction of the Fed’s 2% target.
Auto sales were not quite as good in July as they were in June, but the 16.4 million (annualized) selling rate was the third best since February 2007, behind only May and June of this year.
The ISM purchasing managers’ index hit a 3-year high of 57.1 in July, up from 55.3 in June and ahead of Street expectations. Strength came mostly from new orders, which spurted to a 2014 high of 63.4 from 58.9 in June, and employment, which hit a 3-year high of 58.2.
Bond prices were also lower this past week, although by only around 0.1%. Yields on 10- and 30-year Treasurys increased 3-4 basis points for the week, a little more than that for TIPS yields. Yields at the short end of the Treasury yield curve were slightly lower for the week. With Argentina’s default and Banco Espirito Santo’s large loss hitting the wires, high-yield bonds sold off this past week, behaving more like equities than bonds.
Commodities prices were mostly lower for the week, especially crude oil and unleaded gasoline, which dropped roughly 4% in the futures markets. The dollar gained 0.4% against a trade-weighted basket of currencies; vis-à-vis the euro, the dollar was flat on the week. Foreign stock market returns ranged from +2.8% for Shanghai to -4.5% for Frankfort.
Reports/dates/facts/links to watch for over the next week:
- August 5: Factory orders (June); ISM non-manufacturing index (July).
- August 7: Weekly unemployment claims; consumer credit (June).
- The Atlanta Fed’s new GDP forecasting model: GDPNow
Copyright © 2014 by Wright Investors’ Service, Inc. The views expressed in this blog reflect those of Wright Investors’ Service, Inc. and are subject to change. Statements and opinions therein are based on sources of information believed to be accurate and reliable, but Wright Investors’ Service, Inc. makes no representations or guarantees as to the accuracy or completeness thereof. These views should not be relied upon as investment advice.