Everyday, Everyday I Have the Blues
By John Stoltzfus,
Chief Investment Strategist
Trend Analysis
Market Strategy Radar Screen Weekly August 01, 2016
In this article:
Summertime and the Market Is Easy?
The market faced a number of hurdles last week but
cleared each with a minimum of drama
Perhaps it wasn’t as much summer doldrums on Wall Street last week but as the dog days of summer heat combined with vacation time across trading desks that saw the market churn its way with considerable ease through: a large sample of second-quarter earnings, the Fed FOMC meeting and a disappointing first read on Q2 GDP (growth at 1.2% versus a Bloomberg survey of economists looking for y-o-y growth of 2.5%). Add to that the Democratic National Convention, which was not exactly a Wall Street lovefest, and one might say stocks glided through the week.
The S&P 500 took in what crossed the plate last week, digested it and closed last Friday at 2173.60, or just 0.07% below where it was when it reached its latest record high on the prior Friday.
The Dow 30 (the Dow Jones Industrial Average) fared not quite as well on the week, slipping 0.75% after two of its members, McDonald’s and ExxonMobil, reported results that disappointed. The Dow’s loss was ameliorated somewhat by gains in two other Dow members last week as shares of Apple and Caterpillar advanced despite relatively tough conditions countered by attractive valuations and future prospects.
Merger announcements provided some buoyancy last week, but it was the Fed’s FOMC meeting that really grabbed investor attention, and if only for around 24 hours had some investors thinking once again that the Fed just might raise rates as early as September.
The latter thought was pretty much dashed after the GDP number came out, and prospects for a Fed hike in September fell from 28% to 18%.
We’re reminded that too often investors jump the gun with projections of where the economy or the market is headed based on a single data point. Early reads on GDP quarterly growth are subject to revision in subsequent readings. We’ll hesitate to call the game on this first read of Q2 GDP.
Oil Prices and Energy Sector Outlook
Oil prices continued to fall last week with the price of WTI (West Texas Intermediate) ending July priced just under 14.5% from where it ended June. At $41.60 a barrel on Friday, WTI was off nearly 20% from its 2016 high of $51.23 on June 8th. Oil has fallen on concerns as supply has increased as well as on disappointing quarterly results and comments from a number of the major integrated oil companies this week..
Our expectations as strategists are that oil will remain under pressure for some time while the global economy works its way through the current set of challenges to recovery.
For now global supply levels, sector overcapacity even with the considerable consolidation process that has already occurred, along with technology that boosts exploration, production and efficiencies of use lead us to believe that the sector will remain under pressure in the near to intermediate term. We reiterate our underweight weighting to the S&P 500 Energy sector at this time.
The Week Ahead
Investor attention is likely to be stoked this week with plenty of action culminating with the non-farm payroll number and the headline unemployment number on Friday. A Bloomberg survey of economists is calling for 175,000 jobs to have been added in July and headline unemployment dipping to 4.8%.
Highlights leading up to Friday include the ISM manufacturing index for July (Monday); Fed speak via the Dallas Fed President (Robert Kaplan) on Tuesday; a decision by Japan’s cabinet on Prime Minister Shinzo Abe’s stimulus package, also on Tuesday; the ADP employment data and the ISM non-manufacturing index for July on Wednesday; the Bank of England’s decision on interest rates on Thursday (expectations are for a cut in rates–the last time it cut rates was in 2009).
With a little more than a third of companies left to report Q2 results, the market will be weighing this week’s brace of economic data against Q2 earnings results seeking a catalyst for its next definitive move.
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