What I’m Watching This Week – 5 October 2015

The Markets (as of market close October 2, 2015)

Despite poor employment and manufacturing reports, the equities markets rallied to post gains in each of the major indexes listed here except for the Russell 2000, which ultimately lost less than 1% by last week’s end. The late Friday rally was sparked by gains in energy and materials stocks (following a jump in oil prices), coupled with a lessening of concerns over China’s otherwise gloomy economic picture. Nevertheless, investors piled money into U.S. government bonds, sending the yield on 10-year U.S. Treasuries tumbling to below 2% for the first time since April. However, the jobs and manufacturing reports are likely to forestall any talk by the Fed of an interest rate increase at its next meeting in October.

The price of gold (COMEX) fell a bit, selling at $1,137.60 by late Friday afternoon compared to $1,139.10 a week earlier. Crude oil (WTI) prices gained some, selling at $45.66 per barrel by week’s end. For the sixth week in a row, the national average retail regular gasoline price decreased, dropping to $2.322 per gallon on September 28, 2015, $0.005 under the previous week’s price of $2.327 per gallon and $1.032 below a year ago.

Market/Index 2014 Close Prior Week As of 10/2 Weekly Change YTD Change
DJIA 17823.07 16314.67 16472.37 0.97% -7.58%
Nasdaq 4736.05 4686.50 4707.78 0.45% -0.60%
S&P 500 2058.90 1931.34 1951.36 1.04% -5.22%
Russell 2000 1204.70 1122.79 1114.12 -0.77% -7.52%
Global Dow 2501.66 2259.74 2279.08 0.86% -8.90%
Fed. Funds 0.25% 0.25% 0.25% 0% 0%
10-year Treasuries 2.17% 2.16% 1.99% -17 bps -18 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

  • Last week kicked off with a report on personal income and outlays from the Bureau of Economic Analysis. According to the latest figures, personal income increased $52.5 billion, or 0.3%, and disposable personal income (net income after taxes and adjustments for inflation) increased $47.1 billion, or 0.4%, in August compared to July. The price index for personal consumption expenditures–an indication of inflationary trends–was virtually unchanged in August and only 0.3% ahead of August 2014. However, real disposable income (after adjustments for taxes and inflation) has been at a record high for two consecutive months–likely attributable, at least in part, to cheaper gasoline prices.
  • Total nonfarm employment increased by only 142,000 in September, while the unemployment rate remained unchanged at 5.1%, according to the recent Bureau of Labor Statistics report. September’s job increase falls far below the monthly average of 198,000 jobs per month in 2015. While the job market expanded prior to this summer, it has definitely slowed down, as U.S. employers slammed the brakes on further job expansion, indicative of fears of an economic slowdown. Further evidence of employment contraction includes declines in the labor force participation rate and the employment-population ratio, while average hourly earnings sit at $25.09–down a cent from August.
  • The Institute for Supply Management (ISM) publishes a monthly manufacturing index, which seeks to measure the general direction of production, new orders, backlogs, inventories, imports, exports, and prices. A reading over 50% is considered “expanding.” However, September’s PMI index of 50.2% is 0.9% below August’s reading, and is the lowest reading since May 2013. The New Orders Index registered 50.1%, a decrease of 1.6% from August’s reading of 51.7%, while at 51.8%, the Production Index also fell below the August reading of 53.6%. Although this may be an anomaly, it nevertheless points to a potential weakening in manufacturing and production. Markit’s Manufacturing Purchasing Managers’ Index also indicated another month of relatively subdued growth in September–registering the second-lowest level since October 2013.
  • On the heels of the rather gloomy ISM and Markit reports, the Commerce Department reports that new orders for manufactured goods in August decreased $8.2 billion, or 1.7%, to $473.0 billion. Shipments, down four of the last five months, again decreased $3.2 billion, or 0.7%, to $480.1 billion. Unfilled orders and inventories also decreased in August.
  • The latest figures from the National Association of Realtors® show pending home sales were down 1.4% in August, but still 6.1% ahead of August 2014. While this report indicates some slowdown in existing home sales, it is more reflective of the demand for housing outpacing the supply, and rising home prices in general.
  • The S&P/Case-Shiller Home Price Index measures monthly changes in the value of home prices in 20 metropolitan regions across the country. The latest National Home Price Index recorded a slightly higher year-over-year gain with a 4.7% annual increase in July. On a monthly basis, home prices in July were 0.7% higher than prices in June. According to David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices, “Prices of existing homes and housing overall are seeing strong growth and contributing to recent solid growth for the economy.” The National Home Price Index has risen at a 4% or higher annual rate since September 2012.
  • Construction spending is a sector that has been picking up of late. The U.S. Census Bureau reported that construction spending during August 2015 was estimated at a seasonally adjusted annual rate of $1,086.2 billion, 0.7% above the revised July estimate of $1,079.1 billion. The August figure is 13.7% above the August 2014 estimate of $955.0 billion.
  • Despite downturns in the stock market this month, consumer confidence remained somewhat positive according to The Conference Board’s Consumer Confidence Index®, which increased to 103 in September, compared to 101.3 in August. According to the report, consumers’ appraisal of current conditions was more positive in September, reflective of a more confident outlook for business conditions and the job market.
  • Further evidence of an impending global economic slowdown may lie in the latest report from the International Monetary Fund, which warns of rising corporate debt for companies in emerging markets. Low interest rates available in advanced countries such as the United States and Japan have made it easier for emerging market companies to borrow. “These developments make emerging market economies more vulnerable to a rise in interest rates, dollar appreciation, and an increase in global risk aversion,” according to the report.
  • According to the Commerce Department’s Advance Report: U.S. International Trade in Goods, sagging exports continue to hinder economic growth as exports of goods fell a seasonally adjusted 3.2% to $123 billion in August. While imports advanced 2.2% to $190 billion, it was not enough to prevent further expansion of the trade deficit by 13.6% to $67 billion. The continued strength of the dollar, coupled with weakness overseas, has shifted the sale of goods from U.S. manufacturers to cheaper markets abroad.
  • Jobless claims rose by 10,000 for the week ended September 26, to close at 277,000. The advance seasonally adjusted insured unemployment rate was unchanged at 1.6% for the week ended September 19, while the advance number for continuing unemployment insurance claims decreased 53,000 to 2,191,000.

Eye on the Week Ahead

The week ahead focuses on manufacturing, imports and exports, and international trade–sectors that have been underperforming to date. The situation in China continues to bear watching as that country’s weakening economy continues to influence global stock markets, particularly the major indexes in the United States.