Summer In The City

PaulNolte-2The summer wind has come blowing in, reminding everyone that summer has finally arrived to the northern tier of states. The wind has also blown away the bad news from Europe and China, leaving investors to steam about earnings. There was plenty cooking last week, from tasty morsels from both Amazon and Bank of America. A few were over cooked and good numbers from Apple were greeted as stale. The lack of serious economic data put the focus squarely on earnings (overall OK) and the continued decline in commodity prices. Although the “new” economy that consists of healthcare, technology and telecom may not need the high level of commodity inputs of many other industries, it remains instructive for the global economy to see so many commodity prices fall. Housing starts also fell on the week and we’ll get another peek at housing prices later in the week. The debate continues to rage, will the Fed raise rates or succumb to signs of global slowing and hold rates steady? The conclusion of the Fed meeting on Wednesday may provide a clue or two. Rates won’t get bumped at this meeting, but guidance will be watched closely. It is summer in the city….

The market correction continues, even though the averages remain near all-time highs. For the sixth consecutive day, more stocks fell than rose, even though the SP500 and OTC markets’ finished higher one day last week. The “stealth” correction is either the beginning of something more serious or a part of a year-long corrective action in the markets. There is plenty to worry about in the market today. The number of new lows is at their highest level since the market bottom last October. The net number of advancing to declining stocks is at the lowest level of the year. Finally, the net advancing to declining volume is back to October’s level. So while the averages have held up well, it is not surprising to see so many stocks well down for the year. Many mutual funds are also down for the year as well, even as the SP500 is up just over 2%. This dichotomy is due to the largest SP500 stocks rising while all others have struggled. It might be said that the drag from the energy and materials sector is impacting the broader market or that the energy and materials sector weakness is symptomatic of a poor economy. Either way, unless these conditions begin to change in the coming weeks, the risks are rising that the averages get pulled lower with the rest of the troops.

After one week in positive territory, the bond model flipped back into negative territory, thanks in large part to the poor performance from the utility sector. All that said, the bond market, like stocks, have remained relatively unchanged for the year. For all the talk about higher interest rates, the intermediate and long-term bond yields are slightly higher than where they started the year and short-term rates remain mired at near zero levels. The Fed meets this week to determine the levels of interest rates. It is expected that they will leave rates alone, but they may talk about expectations for increasing them later this year. They are holding to their commentary that they will raise rates later this year. However with inflation rates still very low and wage growth modest, the economic reason to raise rates is not there at the moment. It may be that they will raise rates only because they have been talking about it so much!

The decline in the markets last week has pushed many of the asset classes back below their long-term averages. Only the SP500 and the Russell 2000 (barely above) are still over their averages. Bonds have recovered and are now modestly below their average as well. But the current configuration of the major asset classes makes it tough to see how the markets can move strongly higher in the weeks ahead. Without more participation (which may develop) the SP500 is likely to follow the other asset classes lower. The momentum of the SP500 is now lower than all but two weeks since last October, when stocks last bottomed. The major market question is whether stocks are now done correcting or is this dynamic different and stocks can trend lower? The answer is likely to unfold during August.

The markets seem to be at a cross-road. Since many stocks have already corrected, they can begin to trend higher and take the averages with them. Or, they can continue to decline and put pressure on the averages to also decline. Weakness in the economic building block sectors point to the latter. But this market has had nearly everything but the kitchen sink tossed at it and it continues to do well. Bonds will likely be a refuge during further market weakness. It will be tough to see how the Fed raises rates later this year in this environment.

The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable, but are opinions and do not constitute a guarantee of present or future financial market conditions.