U.S. stock prices started the new week to the upside with gains on the order of 1% for the big-cap stock market averages and gains approaching 1.5% for small-cap indexes. NASDAQ hit a 14-year high, rising 1.0% for the day, while the Dow (+1.1%) and S&P 500 (+0.9%) closed within one (S&P) to two (Dow) percentage points of their all-time peaks, hit last month. On today’s 1.4% advance, the S&P 600 SmallCaps broke into positive territory for the year (+0.2%); the Russell 2000 index’s 1.5% gain left it 0.5% short of last year’s closing price level.
Unlike earlier this year, when defensive stocks and sectors were in favor, Monday’s stock market action was pro-cyclical, with industrials, financials and technology stocks in the lead with gains north of 1%. The two market sectors in the S&P 500 that failed to advance today were telecoms (-0.1%) and utilities (-0.2%). With today’s action, technology stocks joined the health care sector ahead of utilities in the 2014 total return derby, which we take to be an indicator of more positive investor sentiment. Within the S&P 1500 Composite, advancing stocks (1355) were almost 10 times as numerous as decliners (136) on Monday.
Monday’s rally in stocks had its start in Europe, where tensions in Ukraine were said to ease after a weekend meeting of foreign ministers from Russia, Ukraine, Germany and France appeared to make some progress toward a cease-fire. After weeks of mostly lower prices, major European bourses had gains today ranging from 0.8% (U.K.) to 1.7% (Germany). Nonetheless, most of these markets remain in the red for the third quarter (which is also true of the Dow and smaller-cap indexes in the U.S.). German bund yields and yields on other sovereign European debt moved higher Monday as global tensions eased and stock prices firmed. The 10-year German bund ticked back above 1.0% from Friday’s record 0.95% low. The euro sank 0.3% to an 11-month low of $1.3362 Monday.
Asian share prices, which generally began to rebound weeks ahead of Europe, showed more restrained gains on Monday. The Asia Dow average gain was 0.25%, with Shanghai up another 0.6%, and India’s Sensex index closing up 1.1% at a record high. Korea’s KOSPI index was an exception to Monday’s rally, declining 0.5%. The dollar gained 0.2% against the yen to ¥102.55 Monday, while the Chinese yuan continued to recoup its declines from earlier this year, ending up 0.1% to 6.14 to the dollar, its strongest level in five months. The price of gold dipped below $1,300 an ounce, down 0.5% on the day, and crude oil sank almost $1 a barrel to $96.41 (WTI).
As was the case in Europe, higher stock prices produced some selling in the U.S. bond market, where the long Treasury lost a point and a quarter. The 10-year Treasury note lost almost half a point, its yield ticking up 5 basis points to 2.39%. Today’s flash Barclays high-yield composite total return was 0.2%, roughly 35 bps better than its Treasury composite, which lost almost 0.2% on the day. Monday’s Wall Street Journal carried a story suggesting that big investors are snapping up junk bonds as small investors sell; the implication is that Wall Street holds a more bullish view – though not necessarily a more accurate one – on the economic outlook than Main Street does.
While we agree that the likelihood of recession in 2014-15 is small, we are not yet convinced that U.S. economic activity is finally ready to move up to the 3% growth plane from the subpar 2% one it has been on for the past five years. Monday saw the NAHB Housing Market Index rise to 55 in August from 53 in July – modestly improved home builder sentiment but still lower than last August’s 58 level and a long way from healthy.
Reports/dates/facts/links to watch for over the next week:
- August 19: Housing starts (July); consumer price index (July).
- August 20: Minutes of the Federal Reserve’s July 30 monetary policy meeting are released.
- August 21: Weekly unemployment claims; existing home sales (July); U.S. leading economic indicators (July); Philadelphia Fed survey (August).
- August 22: Federal Reserve Chairman Janet Yellen speaks on labor markets at K.C. Fed’s annual Jackson Hole symposium; ECB President Mario Draghi is also slated to speak.
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.