Stocks rallied by roughly 1% Friday – not enough to put the week in the black

Down days had a 3-to-2 edge on up days this past week, and the Dow Jones Industrials ended the week 167 points or 1.0% lower as a result. Other U.S. stock indexes generally had deeper declines and shallower rebounds during the week, and consequently had bigger losses for the full week: S&P 500, -1.4%; NASDAQ, -1.5%; S&P 600 SmallCaps, -2.2%; and S&P 400 MidCaps, -2.3%.

Friday’s stock indexes saw respectable rebounds from Thursday’s steep declines. The major market averages recouped between 44% (S&P SmallCaps) and 63% (Dow) of Thursday’s losses on Friday. A solid final estimate for Q2 GDP provided a bit of a catalyst, although the result was not all that surprising. And corporate profits from current production were revised higher but only marginally so. Could Friday also have been a resurfacing of the “buy the dips” mentality that has on a number of occasions kept stock price corrections from building any momentum? The Dow’s biggest high-low decline over the past two years was 7% this past January.

Every day of the week, the DJIA changed by more than 100 points; of course, 100 points isn’t what it used to be. Volatility was obviously higher this past week, but at its highest (on Thursday) the VIX measure of implied volatility in the S&P 500 was less than 17, and by week’s end VIX had receded under 15. While up from the low levels from mid-August to mid-September, this past week’s VIX range of 13.1-16.7 is still a good bit below the 1990-2014 average of 20. Among 2014’s high flyers, biotech stocks fared better than most for the week, with the NASDAQ Biotech index gaining 0.4%, while social media and internet stocks experienced heightened volatility and generally poor performance.

Foreign stocks also had a dose of volatility this week, although more so in Europe than in Asia. Indeed, Shanghai ended the week with a gain of nearly 1%, and in Japan, the Topix index was unchanged for the week. Elsewhere in Asia, Hong Kong (-2.6%), India (-1.7%) and Australia (-2.2%) were less fortunate. Europe’s declines for the week ranged from 0.8% in Milan to 3.2% in Frankfurt. The euro fell more than 1% for the week, 0.5% on Friday, when it hit a two-year low of $1.2685. The yen also lost 0.5% against the dollar on Friday, but only 0.2% for the week; still Friday’s closing level of 109.29 yen to the dollar was the weakest yen/dollar rate in 6 years.

The BEA’s final estimate of Q2 2014 GDP growth was 4.6% – essentially what the Street was expecting – up from last month’s 4.2% preliminary estimate. Almost all sectors of the economy were a tad better in the final estimate than in the preliminary estimate, except for imports, and even the downward revision to imports was a positive for GDP since in NIPA accounting imports are a subtraction from gross domestic product.

Looking at economic trends for the just ending third quarter, the latest update from the Atlanta Fed’s GDPNow model was for a 3.3% annual rate of growth in Q3 GDP. Following today’s wrap on Q2 GDP, that 3.3% projection appears reasonable, if a bit ambitious. Perhaps the most impressive part of Friday’s final report on Q2 2014 GDP was the boost in final sales to a 3.2% growth rate (from 2.8%), only the fourth time that final sales growth has exceeded 3% since 2006 – 3 of those occasions coming in the past 4 quarters.

Rising stock prices and Bill Gross’s surprise move from PIMCO to Janus sent bond prices lower Friday. Friday’s weakness in bond prices was said to be due in part to concerns that a Gross-less PIMCO might be less inclined toward Treasurys. That at least appeared to be the knee-jerk reaction when the news of Gross’s departure hit the wire. The 30-year TIPS bond lost about one point in price Friday. For the week, though, the long end of the Treasury curve saw lower yields (and higher prices): the long Treasury fell 7 basis points to 3.22% at Friday’s close, and the 10-year T-note yield 5 bps for the week to end at 2.53%. High yield bonds had negative returns all five days this past week, ending down 1.4% for the week, as compared to a positive 0.3% return in Treasurys.

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

  1. September 29: U.S. personal income and spending (August); pending home sales (August); Dallas Fed manufacturing survey (September); Japan industrial production (August); China Markit manufacturing PMI (September).
  2. September 30: Consumer confidence (September); Case-Shiller home price indexes (July); Chicago PMI (September).
  3. October 1: ADP national employment report (September); construction spending (August); ISM manufacturing composite index (September).
  4. October 2: Factory orders (August); weekly unemployment claims.
  5. October 3: Employment situation (September); ISM non-manufacturing composite index (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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