Stocks fall Friday and for the week

U.S. stock prices suffered their first down week since July, with the S&P 500 losing 1.1% from the prior Friday’s all-time high. Roughly half of this decline came on Friday, when the S&P 500 dropped 0.6%. The Dow Jones Industrials fell 150 points (0.9%) for the week, 61 points (0.4%) on Friday. NASDAQ declined just 0.3% for the week as Apple, its biggest member, gained 2.7% in a week of new product introductions, including the iPhone 6.

AAPL shares were a big reason that technology was the only one of the S&P 500’s 10 market sectors to post a gain for the week, albeit only a minuscule one. Financials (-0.4%), health care (-0.6%) and industrials (-0.6%) all managed to limit the week’s losses, but energy (-3.7%) and utilities (-3.3%) did not. The latter sector was battered by rising interest rates, the former by declining energy prices.

In the commodities pits this past week, unleaded gasoline futures fell 2.5% to a 10-month low, while quotes on crude oil contracts were down as much as 3.7%. That is what the nearby futures contract on Brent crude did for the week in reaching a more than two-year low of $97.11 a barrel. Heating oil fell 2.8% for the week, as did gold and silver quotes.

U.S. economic news reported Friday was upbeat, with retail sales rising by the most since April and consumer sentiment at its highest level in 14 months. The U.S. Census Bureau reported on Friday that retail sales increased 0.6% in August, in line with Street forecasts. Excluding automobiles and gasoline station sales, August sales increased 0.5%, again on target with analyst estimates. In addition, revisions to previous data show that July was not nearly as weak as first reported; total sales gained 0.3% in July, not the “flat” sales result estimated one month ago. On a smoothed, three-month moving average basis, real retail sales are running 2.4% ahead of 2013 levels, on both a total basis and a core basis. The University of Michigan’s early September reading on consumer sentiment saw the best index level since July 2013. We caution that confidence is still a bit below average when taking a longer perspective, say 30 years.

The yield on the 10-year Treasury bond climbed to a two-month high of 2.61% on Friday, with concern rising that the coming week’s FOMC policy meeting may indicate that Fed tightening is closer than investors think. This sentiment was reinforced by Friday’s generally positive retail sales report, the latest of a number of better-than-expected economic reports over the past several weeks. The slope of the yield curve bent higher this week, with long Treasury yields increasing two to three times the five basis-point rise in two-year Treasurys. Since August, long Treasurys and TIPs yields are up more than 25 basis points. TIPS have lost 2.4% over the past four weeks, more than twice the loss in straight Treasurys.

Finally, the Federal Reserve announced the formation of a new financial stability committee, to be chaired by Fed Vice-Chairman Stanley Fischer, to monitor and presumably avert asset bubbles and market crashes. Having witnessed two major (50%-ish) bear markets in the past decade and a half, who wouldn’t appreciate such an effort? If only it could be achieved. Past Fed Chairmen Greenspan and Bernanke showed no great ability to anticipate such market busts, and Janet Yellen says she has no such concern currently. One wonders if the Committee’s formation represents a undermining of Yellen’s current, somewhat dovish policy position.

Thirteen years after the September 11 terrorist attacks, a review of market price changes since then provides some perspective on the long-term persistence of stock and bond returns. From September 10, 2001 (markets were closed on September 11) through this September 11, stock price indexes increased from roughly 80% for the Dow and S&P 500 to more than 200% for smaller-cap indexes. Counting dividends, the major U.S. stock market indexes averaged the following annual rates of return for the 13 years: S&P 500, 6.9%; Dow, 7.1%; NASDAQ, 8.9%; S&P 400 MidCaps, 10.5%; S&P 600 SmallCaps, 10.5%. In bonds, the Barclays Aggregate averaged a 5.0% annual return, and the Barclays Credit composite averaged 6.0% per annum. Considering that there were one and a half bear markets during the 13-year period, these rates of return are quite respectable – especially in view of the 2.3% rate of inflation (CPI) over the period. Only 3-month T-Bills (1.5% annual rate of return) failed to keep pace with inflation.

Reports/dates/facts/links to watch for over the next week:

  1. September 15: U.S. industrial production for August; NY Fed Empire State manufacturing index for September.
  2. September 16: German ZEW survey for September; U.S. same store sales for the latest week; U.S. PPI-FD for August.
  3. September 17: U.S. CPI for August; FOMC economic and rate forecasts; Yellen post-FOMC-meeting press conference.
  4. September 18: Scotland’s independence referendum; U.S. housing starts (August); Philly Fed business outlook survey (September).
  5. September 19: U.S. leading economic indicators (August); Atlanta Fed’s business inflation expectations (September).

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.

About wrightnetblogger

Senior Vice President – Investment Research/Economist
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