U.S. stocks added to Thursday’s gain, rounding the week out on a positive note as the dollar completed a two-week rally and crude moved lower in six of the eight sessions of that fortnight. Again, consumer staples and financials led the way. These are the industries that present the largest concern, and thus they move the most based on wavering investor sentiment. A stronger dollar and lower oil price reduces concerns over the consumer as they are already hit by a housing market correction.
Consumer staples and industrial shares also provided the benchmarks with a boost on Friday. Industrials are enjoying a very nice machinery-orders trend and overall increase in business spending of the past three months – the S&P 500 index that tracks these shares has bounced 10% from the mid-July multi-year low.
Market Activity for August 15, 2008
We’ve talked about how the market is stuck in a trading range as uncertainties over tax rates, housing, inflation and geopolitical risks (now Russia throws another risk in as they attempt to gain control over the Tbilisi pipeline and Eastern Europe as a whole, if allowed). The broad market moved to a new, lower trading range in July but we have bounced nicely from those lows as the dollar/oil trend has offered a concrete boost.
The chart below shows the 22.38% decline from the October 9 all-time high and the 6.85% bounce from that July 15 multi-year low. The shaded area (it’s tough to make out, but it’s lightly shaded in green) illustrates the trading range that formed prior to moving below 1275 on the S&P 500 in July.
From a longer-term perspective, there are many attractive buys out there as an abundance of stocks trade below the market multiple, yet offer market-beating earnings growth. As we have to deal with a bevy of uncertainties at the present it makes for a frustrating time to be invested in stocks. However, whether it takes six months or two years, at some point stocks are going to rebound in strong fashion, in my opinion. While the S&P 500 is up 72.2% since March 2003 (10.5% annualized), the index is essentially flat going all the way back to August 2000. While the market struggles with the uncertainties mentioned above, these risks will eventually wane. (We’ll note that mid and small cap stocks are up roughly 6% and 5% at annualized rates, respectively over the past eight years.)
Outside of geopolitical events, my chief concern is what will happen to tax rates across-the-board. But any mistakes in this regard will lead to a reversal as the House comes up for election every two years. Further, the fact that most developed countries are pushing tax rates lower, it will become quickly obvious (if not painfully so) the decision to raise rates here at home is the wrong prescription.
On the economic front, New York manufacturing conditions improved mildly as the Empire Manufacturing survey advanced to +2.8 – the first positive number for the index in three months. A reading above zero marks expansion, as opposed to the ISM and Chicago manufacturing surveys where it takes a reading above 50 to mark expansion, just for clarification..
However, some of the sub-indices within the report deteriorated as the new orders index fell to -2.2 from 8.3 in July and the shipments index fell to -0.9 from a strong 13.5 reading last month.
Inflation pressures remained elevated and the future prices received index jumped to a record.
On the bright side, the employment index improved, even if it remained below zero. Expectations of business conditions six month out jumped 19 points to 34.6.
In a separate report the Commerce Department reported industrial production rose for the second-straight month in July, increasing 0.2%.
Production of machinery (up 0.7%) and business equipment (up 0.8%) led the figure higher. Even when we exclude motor vehicles and auto parts, as vehicles and auto parts were up a large 3.6% in July simply because the American Axle strike came to an end a couple of months back, the reading remained positive. (Since unit vehicle sales remain weak, one should not expect this segment to help out over the next few months, so the ex-vehicle/parts reading becomes important to watch.)
Many were expecting electrical utility output to lead the production reading higher, but this segment actually declined 2.3% -- which is unusual for July. It is quite telling that the overall, and that ex-auto reading, advanced even with this segment –which accounts for 10% of the total – declining significantly.
Have a great day!
Brent Vondera, Senior Analyst
Consumer staples and industrial shares also provided the benchmarks with a boost on Friday. Industrials are enjoying a very nice machinery-orders trend and overall increase in business spending of the past three months – the S&P 500 index that tracks these shares has bounced 10% from the mid-July multi-year low.
Market Activity for August 15, 2008
We’ve talked about how the market is stuck in a trading range as uncertainties over tax rates, housing, inflation and geopolitical risks (now Russia throws another risk in as they attempt to gain control over the Tbilisi pipeline and Eastern Europe as a whole, if allowed). The broad market moved to a new, lower trading range in July but we have bounced nicely from those lows as the dollar/oil trend has offered a concrete boost.
The chart below shows the 22.38% decline from the October 9 all-time high and the 6.85% bounce from that July 15 multi-year low. The shaded area (it’s tough to make out, but it’s lightly shaded in green) illustrates the trading range that formed prior to moving below 1275 on the S&P 500 in July.
From a longer-term perspective, there are many attractive buys out there as an abundance of stocks trade below the market multiple, yet offer market-beating earnings growth. As we have to deal with a bevy of uncertainties at the present it makes for a frustrating time to be invested in stocks. However, whether it takes six months or two years, at some point stocks are going to rebound in strong fashion, in my opinion. While the S&P 500 is up 72.2% since March 2003 (10.5% annualized), the index is essentially flat going all the way back to August 2000. While the market struggles with the uncertainties mentioned above, these risks will eventually wane. (We’ll note that mid and small cap stocks are up roughly 6% and 5% at annualized rates, respectively over the past eight years.)
Outside of geopolitical events, my chief concern is what will happen to tax rates across-the-board. But any mistakes in this regard will lead to a reversal as the House comes up for election every two years. Further, the fact that most developed countries are pushing tax rates lower, it will become quickly obvious (if not painfully so) the decision to raise rates here at home is the wrong prescription.
On the economic front, New York manufacturing conditions improved mildly as the Empire Manufacturing survey advanced to +2.8 – the first positive number for the index in three months. A reading above zero marks expansion, as opposed to the ISM and Chicago manufacturing surveys where it takes a reading above 50 to mark expansion, just for clarification..
However, some of the sub-indices within the report deteriorated as the new orders index fell to -2.2 from 8.3 in July and the shipments index fell to -0.9 from a strong 13.5 reading last month.
Inflation pressures remained elevated and the future prices received index jumped to a record.
On the bright side, the employment index improved, even if it remained below zero. Expectations of business conditions six month out jumped 19 points to 34.6.
In a separate report the Commerce Department reported industrial production rose for the second-straight month in July, increasing 0.2%.
Production of machinery (up 0.7%) and business equipment (up 0.8%) led the figure higher. Even when we exclude motor vehicles and auto parts, as vehicles and auto parts were up a large 3.6% in July simply because the American Axle strike came to an end a couple of months back, the reading remained positive. (Since unit vehicle sales remain weak, one should not expect this segment to help out over the next few months, so the ex-vehicle/parts reading becomes important to watch.)
Many were expecting electrical utility output to lead the production reading higher, but this segment actually declined 2.3% -- which is unusual for July. It is quite telling that the overall, and that ex-auto reading, advanced even with this segment –which accounts for 10% of the total – declining significantly.
Have a great day!
Brent Vondera, Senior Analyst
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