U.S. stocks ended mixed on Friday as the Dow and S&P 500 closed lower, while the tech-laden NASDAQ Composite managed a slight gain after better-than-expected earnings results from Dell and a boosted forecast from Intel. Weighing on the broad market was data that showed personal incomes were flat in July, following a decline in June, and traders wondering what will happen to the spending side after August as the “cash for clunkers” program has come to an end.
Despite the mixed results on Friday all three major indices gained ground for the week. The Dow gained 0.27%; the S&P 500 added 0.40%; the NASDAQ Composite rose 0.39%. Among smaller capitulation stocks, the S&P 400 (mid cap stocks) gained 0.50%; the Russell 2000 (small caps) fell 0.28%.
Basic materials, tech and financial shares led the broad market higher. Health-care shares, down 0.91% for the biggest loser on Friday, led the decliners.
Volume remained pretty weak for Friday’s session (1.2 billion shares) and all of last week (an average of just 1.1 billion). We’ve had trading volume average less than 1.2 billion shares over the past three months, that’s roughly 15% lower for this time of year.
Market Activity for August 28, 2009
Personal Income and Spending
The Commerce Department reported that personal incomes were unchanged in July (missing expectations for a 0.1% increase) after a 1.1% decline in June, a number that was revised higher from the 1.3% drop initially estimated. Personal income has dropped 2.4% from the year-ago period.
While the headline figure didn’t show it, the internals of the income data were a vast improvement from what we’ve seen over the past several months. Compensation and wages & salaries (two of the three largest components of the data, personal income from assets being the third) both rose 0.1% in July; this follows eight month of decline. So, even though the 0.1% increase is paltry and won’t do much to help elevate consumption, it’s something. These key components have gotten shellacked over the past 12 months, down 4.2% and 5.1%, respectively.
Regarding other segments: proprietor’s income gained 0.6%; rental income jumped 3.3% (the only private-sector component that has looked good over the past year – up 26.4% past 12 months); personal income from assets fell 1.0%, with a 2.6% decline in dividend income (down a massive 23% y-o-y) and interest income lower by 0.3%; government transfer payments declined 0.2%.
On the spending side, activity rose 0.2%, which was in line with expectations following a 0.6% pick up in June – revised up from 0.4%. Spending was helped by the “cash for clunkers” program, offsetting continued weak results from most retailers. This is evident by way of the internals as non-durable goods consumption (things like clothing, electronics, etc.) fell 0.3% in July, while durable goods (items meant to last at least three years (like cars and appliances) jumped 1.33%. The CARS program should have a larger positive effect on August’s spending activity, but this will be borrowing from the future as income growth will remain weak.
As spending outpaced incomes in July, the personal savings rate (cash savings) slipped back to 4.2% from 4.5% in June and off of its 11-year high of 6% hit in May.
This is what I mean by borrowing from the future. The CARS program is just delaying what needs to occur, a cash savings rate that needs to settle in at roughly 8% in order to get consumers feeling right again – based on current realities within the home, stock and labor markets.
Normally, I don’t make a big deal about the personal savings rate, as the two major savings vehicles (homes and stocks) are generally on an upward trend. But this is not the trend today as both have been hit hard, stocks down 34% from their peak and homes off by 20%. Also, with the unemployment rate at a 26-year high (and likely to move higher before it comes lower) a boost to cash savings is essential. The CARS program also encourages the addition of debt to households and this too will delay a sustained spending rebound.
PCE Deflator
The inflation gauge tied to the personal spending data remained unthreatening in July. The core rate, which excludes food and energy (I’ll predict right now that consumers will become really tired of hearing about inflation gauges that exclude these components a year to 18 months out) rose 0.1% for the month and is up 1.4% year-over-year The headline number (includes every component) fell 0.8%.
This is the situation now, but things will change come November. This is when the year-ago comps becomes very weak. Right now, by contrast, the inflation gauges are being matched against numbers that were very high due to last summer’s commodity-price spike ($145 per barrel oil and $4 gasoline – just to mention the commodities that I’m sure you remember). I’m not saying inflation will rage come November, but it will very likely begin to tick higher. There is some embedded inflation right now, the core rate, while tame, is showing the deflation talk is bunk. Over the past four months, the core rate is up 2.1% at an annual rate.
Again, nothing to get terribly alarmed about in the meantime, but as the economy begins to rebound, even if that progression is a very slow one from a historical perspective, this embedded inflation as I’m calling it will feed more quickly into higher prices. As the Fed keeps rates very low, and there’s a heightened probability they won’t have the will to reverse the current course of monetary policy (when needed) due to a jobless rate that remains high, the inflation gauges will begin to show life again.
No one envies Mr. Bernanke’s position, he will have to work magic in order to allow the economy to strengthen while keeping inflation subdued. The Fed has backed itself into a corner, in my opinion, after several years of misguided policy decisions.
Japan’s Electoral Shift
An electoral landslide occurred, if the polls are correct, in Japan this weekend. The DPJ will take over from the LDP, ending just about 50 years of rule. The Japanese economy will need more than a change in the political leadership; they’ll need to completely change policy, shifting from high tax rates and what has become annual government stimulus spending programs to very low tax rates across the board.
Japan’s main obstacle is one of demographics, the most aged population in the world and getting worse due to very low birthrates. They need an immigration jolt to change things and an aggressive shift in their tax regime will encourage businesses and labor capital to flow into the country. Japan’s GDP has literally gone no where since 1996 and has barely increased since 1992. If this isn’t enough to foster a complete change in their economic policy, nothing is.
Have a great day!
Brent Vondera, Senior Analyst
Despite the mixed results on Friday all three major indices gained ground for the week. The Dow gained 0.27%; the S&P 500 added 0.40%; the NASDAQ Composite rose 0.39%. Among smaller capitulation stocks, the S&P 400 (mid cap stocks) gained 0.50%; the Russell 2000 (small caps) fell 0.28%.
Basic materials, tech and financial shares led the broad market higher. Health-care shares, down 0.91% for the biggest loser on Friday, led the decliners.
Volume remained pretty weak for Friday’s session (1.2 billion shares) and all of last week (an average of just 1.1 billion). We’ve had trading volume average less than 1.2 billion shares over the past three months, that’s roughly 15% lower for this time of year.
Market Activity for August 28, 2009
Personal Income and SpendingThe Commerce Department reported that personal incomes were unchanged in July (missing expectations for a 0.1% increase) after a 1.1% decline in June, a number that was revised higher from the 1.3% drop initially estimated. Personal income has dropped 2.4% from the year-ago period.
While the headline figure didn’t show it, the internals of the income data were a vast improvement from what we’ve seen over the past several months. Compensation and wages & salaries (two of the three largest components of the data, personal income from assets being the third) both rose 0.1% in July; this follows eight month of decline. So, even though the 0.1% increase is paltry and won’t do much to help elevate consumption, it’s something. These key components have gotten shellacked over the past 12 months, down 4.2% and 5.1%, respectively.Regarding other segments: proprietor’s income gained 0.6%; rental income jumped 3.3% (the only private-sector component that has looked good over the past year – up 26.4% past 12 months); personal income from assets fell 1.0%, with a 2.6% decline in dividend income (down a massive 23% y-o-y) and interest income lower by 0.3%; government transfer payments declined 0.2%.
On the spending side, activity rose 0.2%, which was in line with expectations following a 0.6% pick up in June – revised up from 0.4%. Spending was helped by the “cash for clunkers” program, offsetting continued weak results from most retailers. This is evident by way of the internals as non-durable goods consumption (things like clothing, electronics, etc.) fell 0.3% in July, while durable goods (items meant to last at least three years (like cars and appliances) jumped 1.33%. The CARS program should have a larger positive effect on August’s spending activity, but this will be borrowing from the future as income growth will remain weak.
As spending outpaced incomes in July, the personal savings rate (cash savings) slipped back to 4.2% from 4.5% in June and off of its 11-year high of 6% hit in May.
This is what I mean by borrowing from the future. The CARS program is just delaying what needs to occur, a cash savings rate that needs to settle in at roughly 8% in order to get consumers feeling right again – based on current realities within the home, stock and labor markets.Normally, I don’t make a big deal about the personal savings rate, as the two major savings vehicles (homes and stocks) are generally on an upward trend. But this is not the trend today as both have been hit hard, stocks down 34% from their peak and homes off by 20%. Also, with the unemployment rate at a 26-year high (and likely to move higher before it comes lower) a boost to cash savings is essential. The CARS program also encourages the addition of debt to households and this too will delay a sustained spending rebound.
PCE Deflator
The inflation gauge tied to the personal spending data remained unthreatening in July. The core rate, which excludes food and energy (I’ll predict right now that consumers will become really tired of hearing about inflation gauges that exclude these components a year to 18 months out) rose 0.1% for the month and is up 1.4% year-over-year The headline number (includes every component) fell 0.8%.
This is the situation now, but things will change come November. This is when the year-ago comps becomes very weak. Right now, by contrast, the inflation gauges are being matched against numbers that were very high due to last summer’s commodity-price spike ($145 per barrel oil and $4 gasoline – just to mention the commodities that I’m sure you remember). I’m not saying inflation will rage come November, but it will very likely begin to tick higher. There is some embedded inflation right now, the core rate, while tame, is showing the deflation talk is bunk. Over the past four months, the core rate is up 2.1% at an annual rate.
Again, nothing to get terribly alarmed about in the meantime, but as the economy begins to rebound, even if that progression is a very slow one from a historical perspective, this embedded inflation as I’m calling it will feed more quickly into higher prices. As the Fed keeps rates very low, and there’s a heightened probability they won’t have the will to reverse the current course of monetary policy (when needed) due to a jobless rate that remains high, the inflation gauges will begin to show life again.
No one envies Mr. Bernanke’s position, he will have to work magic in order to allow the economy to strengthen while keeping inflation subdued. The Fed has backed itself into a corner, in my opinion, after several years of misguided policy decisions.
Japan’s Electoral Shift
An electoral landslide occurred, if the polls are correct, in Japan this weekend. The DPJ will take over from the LDP, ending just about 50 years of rule. The Japanese economy will need more than a change in the political leadership; they’ll need to completely change policy, shifting from high tax rates and what has become annual government stimulus spending programs to very low tax rates across the board.
Japan’s main obstacle is one of demographics, the most aged population in the world and getting worse due to very low birthrates. They need an immigration jolt to change things and an aggressive shift in their tax regime will encourage businesses and labor capital to flow into the country. Japan’s GDP has literally gone no where since 1996 and has barely increased since 1992. If this isn’t enough to foster a complete change in their economic policy, nothing is.
Have a great day!
Brent Vondera, Senior Analyst
No comments:
Post a Comment