The Markets

Investors brushed off geopolitical fears last week and regained their appetite for risk, taking the S&P 500 to its 32nd record high of the year and returning the small-cap Russell 2000 to positive territory for 2014. Meanwhile, the yield on the benchmark 10-year Treasury hit a level it hasn’t seen in more than a year as higher demand pushed prices up.

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

• The U.S. economy grew slightly faster during the second quarter than previously thought. The Bureau of Economic Analysis said the 4.2% figure for gross domestic product was revised upward from 4% primarily because of a higher figure for commercial construction and business investment in equipment. Meanwhile, corporate after-tax profits rebounded from a -16.3% decline in Q1, rising 8.3% during Q2.
• A 318% increase in orders for commercial aircraft led to a 22.6% surge in durable goods orders in July. The Commerce Department said that excluding transportation, orders actually fell 0.8%, while business investment in equipment was down 0.5% after a strong gain the previous month.
• Sales of new homes fell 2.4% in July, according to a Commerce Department report. That raised questions about the state of the housing market, especially since the National Association of Realtors^® had reported the previous week that home resales had actually risen 2.4% during the month.
• Meanwhile, home prices showed continued signs of leveling off in cities measured by the S&P/Case-Shiller 20-City Composite Index. Though the index gained 1% in June and was up 8.1% year-over-year, all 20 cities experienced slower annual growth rates for the first time since February 2008. An S&P spokesman predicted that mortgage rate increases, anticipated next year, “will further dampen price gains.”
• Americans spent less and saved more in July as income growth slowed. The Commerce Department reported that consumer spending was down 0.1%, in part because of reduced auto and department store sales, while incomes rose 0.2% rather than the 0.5% seen during the previous two months. As a result, the savings rate hit 5.7%–its highest level since late 2012.
• Burger King became the latest company to draw fire for so-called “tax inversion” by announcing it is negotiating to buy Canadian chain Tim Hortons. The agreement would allow Burger King to move its headquarters to Canada and reduce its corporate tax burden.
• The inflation rate in the eurozone continued to slide, hitting 0.3% in August. The decline, coupled with European Central Bank President Mario Draghi’s stated willingness to consider additional economic stimulus, prompted speculation that the ECB could take action at its next meeting on September 4. The eurozone unemployment rate was 11.5%, down only slightly from a year earlier.

Eye on the Week Ahead

In addition to monitoring an onslaught of economic data, global investors will look to the European Central Bank’s Thursday meeting for possible stimulus measures similar to the ones the Federal Reserve has been winding down.

The Markets

Last week domestic equities managed to build on the gains of the week before. The Dow industrials finally returned to positive territory for the year, and the Nasdaq had the kind of weekly gain it hasn’t seen since late May. Meanwhile, geopolitical tensions helped spur interest in the relative safety of the benchmark 10-year Treasury, cutting the yield to its lowest level since June 2013.

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

• Auto and department store sales declined in July, while grocery stores, gas stations, restaurants, clothing stores, and building supply stores all saw gains. That left total retail sales essentially flat for the month, though the Commerce Department said they were up nearly 4% from a year earlier.
• Wholesale prices rose 0.1% in July, according to the Bureau of Labor Statistics. That was slightly less than June’s 0.4% increase, and cut the annual wholesale inflation rate for the last 12 months to 1.7% from June’s 1.9%. The biggest monthly increases were seen in transportation and warehousing, which were up 0.5%, while wholesale food costs rose 0.4% and energy prices fell 0.6%.
• Led by a 10.1% increase in auto manufacturing, U.S. industrial production rose 0.4% in July, according to the Federal Reserve. The overall increase represented the sixth straight monthly gain. Even aside from the surge in autos, production was up 0.2%, and the percentage of the nation’s manufacturing capacity that’s being used rose to 79.2%.
• After the Fed’s Empire State manufacturing survey hit a four-year high, the August report showed that improvement had slowed substantially as the reading fell 11 points to 14.7.
• Sluggish economic recovery in the 18-member eurozone stalled completely during Q2 as growth fell from 0.2% in Q1 to 0. More worrisome was the -0.2% decline in both the German and Italian economies, which are two of the tentpoles of the region’s economy. The larger 28-member European Union saw a 0.2% increase in gross domestic product, and the official EU statistics agency said GDP had risen in both areas compared to a year earlier (0.7% for the eurozone and 1.2% for the EU).

Eye on the Week Ahead

Speeches at the Fed’s annual Jackson Hole conference could influence markets given the internal debate over the timing of interest rate hikes. Investors will continue to monitor the situations in Ukraine, Gaza, and Iraq, and housing and consumer inflation data also are on tap.

Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

The Markets

Investor indecision about the future of equities prices, coupled with light summer trading volumes, led to volatility across the board last week. Friday’s 186-point rally gave the Dow some relief after two down weeks, though not enough to nudge the index into positive territory for the year. The small caps of the Russell 2000 had their strongest week since early July, though they also remained down year-to-date. Meanwhile, geopolitical tensions increased demand for the relative security of the benchmark 10-year Treasury bond, sending its yield down. However, riskier high-yield bonds saw some selling pressure.

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

• Growth in the U.S. services sector accelerated in July. The Institute for Supply Management’s gauge of activity in service industries rose 2.7% to 58.7%–its highest level since the index was launched in 2008.
• New orders at U.S. manufacturers were up 1.1% in June. The Commerce Department said the gain boosted factory orders to their highest level since record-keeping began in 1992 and that June was the fourth month of the last five to see an increase.
• A drop in oil imports helped cut the U.S. trade deficit by 7% in June, according to the Commerce Department. U.S. exports rose 0.1% to their highest level on record, while imports dropped 1.2%.
• Italy’s economy fell back into recession, falling 0.2% in Q2; it was the second consecutive quarterly contraction. The GDP of the eurozone’s third largest economy also was down 0.3% from the same quarter a year earlier.
• In retaliation for new European Union and U.S. economic sanctions, Russia imposed a one-year ban on a variety of food imports and said it’s considering prohibiting EU and U.S. flights from Russian airspace over Siberia.
• As expected, the European Central Bank left key interest rates unchanged. President Mario Draghi said measures already adopted are having an effect and that it was too early to assess the potential impact of Russia’s ban on European food imports.
• Eleven of the largest U.S. banks must rewrite their proposed plans for handling a potential bankruptcy. The Federal Reserve and Federal Deposit Insurance Corp. said the plans contained “no credible or clear path” to achieve an orderly failure and avert any need for the type of bailouts provided during the 2008 financial crisis. The banks have until July 2015 to submit revised so-called “living wills.”
• Fair Isaac Corp. said it will change the way it calculates credit scores, underweighting unpaid medical bills and excluding overdue bills that are subsequently paid or settled with a collection agency. The changes could make it easier to get credit.

Eye on the Week Ahead

With the Q2 earnings season winding down, retail sales and wholesale inflation data will vie with global conflicts for investor attention. Speeches by two members of the Fed’s monetary policy committee are likely to review the arguments for and against accelerating an interest rate hike. Finally, options expiration at week’s end plus trading volumes that are likely to remain relatively low could mean additional volatility.

The Markets

A strong GDP report, generally positive corporate earnings, and a slightly more optimistic outlook from the Fed couldn’t offset the ongoing stream of bleak news about geopolitical problems and investor desire to take some money off the table. The Russell 2000’s recent losing streak spread to the large caps as the S&P 500 had its worst week of the year. Argentina’s default on sovereign debt helped prompt a selloff on Thursday, which cut 317 points from the Dow and sent it back into negative territory for the year.

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

• The initial estimate of 4% U.S. economic growth in Q2 showed a strong rebound from Q1’s 2.1% contraction. However, the Bureau of Economic Analysis’s initial estimate is subject to revisions over the next two months (for example, the initial Q1 estimate showed a 0.1% gain). Increases in exports and consumer spending (especially on durable goods) as well as more business inventory investment and state/local government spending drove the gains in gross domestic product.
• The unemployment rate ticked up slightly to 6.2% in July but was still at its lowest level in almost six years and more than a full percentage point below a year earlier. The Bureau of Labor Statistics also said the 209,000 new jobs added to payrolls in July roughly equaled the average monthly job gains over the last year; though that’s down from the pace of the last three months, July was the sixth straight month in which 200,000+ new jobs have been added.
• Home prices continued to improve, but at a slower pace. All the cities in the S&P/Case-Shiller 20-City Composite Index report issued last week saw increases, but the 9.4% increase over last May was down from the previous month’s 10.8% year-over-year gain.
• The Federal Reserve’s monetary policy committee continued to reduce its bond purchases, cutting them to $25 billion a month. The Federal Open Market Committee statement noted increased spending by both consumers and businesses as well as improvements in employment, though it also said there continues to be slack in the labor market. It also said that as long as inflation remains below 2%, its target interest rate is likely to remain at its current level for “a considerable time” after new bond purchases end completely. However, the moderately more positive language plus hawkish comments from one committee member helped elevate concerns about the timing of rate increases.
• Both the European Union and the United States attempted to increase pressure on Russia to end support for Ukrainian rebels. Previous sanctions have been largely directed toward individuals; the new measures are expected to affect Russian banks, the country’s oil industry, and the military. The EU agreement is designed to isolate Russia economically without hampering Europe’s fragile economic recovery.
• After Argentina failed to reach a settlement with large holders of $13 billion of sovereign bonds that have already been restructured once, Standard & Poor’s declared it in default on other interest payments. Coupled with a quarterly loss reported by Portugal’s second-largest bank, Argentina’s debt problems once again raised questions about the resilience of emerging economies.
• Trustees of the fund that finances Medicare reported that slower growth in federal health-care spending as a result of the Affordable Care Act appears to have helped delay by four years the date by which Medicare is expected to run out of money. The trustees now see that occurring in 2030. Social Security is expected to be solvent until 2033, but trustees of the Social Security Trust Fund said that unless action is taken, a shortfall might require cuts in disability benefits starting in late 2016.
• According to the Commerce Department, U.S. construction spending slumped nearly 2% in June. However, that was still 5.5% higher than in June 2013. Both public and private spending on residential and commercial building fell.
• The Institute for Supply Management said U.S. manufacturing continued to accelerate in July as its survey of purchasing managers rose to 57.1 from 55.3 (any number above 50 indicates expansion).

Eye on the Week Ahead

Investors will try to gauge whether last week’s downdraft was the start of something bigger or a much-needed breather for a lengthy bull market.

Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK);www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

The Markets

Encouraging economic news, generally positive Q2 corporate earnings reports, and stable Federal Reserve policy had to battle multiple geopolitical conflicts for investor attention. Both the S&P 500 and Dow industrials managed to set fresh all-time highs early in July, but the S&P managed to follow through to additional records while the Dow slipped back under 17,000. After five straight positive months, both succumbed to profit-taking that left them under water for July. That handed the year-to-date lead to the Nasdaq (barely), while the small caps of the Russell 2000 gave up most of the previous month’s gains and joined the Dow in negative territory for the year. Global conflicts and instability in some emerging markets also hurt the Global Dow.

After a June rally, gold prices slid back under $1,300 an ounce in July. A stronger dollar allowed the price of oil to drop below $100 a barrel by the end of the month. Meanwhile, the benchmark 10-year Treasury yield ended the month up slightly from where it began.

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.

The Month in Review

• The U.S. economy seems to have rebounded from Q1’s 2.1% contraction, growing 4% in Q2. However, that initial estimate of gross domestic product is subject to revisions by the Bureau of Economic Analysis over the next two months (for example, the initial Q1 estimate showed a 0.1% gain). Increases in exports and consumer spending (especially on durable goods) as well as more business inventory investment and state/local government spending drove the GDP gains.
• The unemployment rate remained at its lowest level in almost six years (6.2% in July), which is more than a full percentage point below a year earlier. The Bureau of Labor Statistics also said the 209,000 new jobs added to payrolls in July roughly equaled the average monthly job gains over the last year.
• Manufacturing data was generally encouraging. New orders for U.S. manufacturers were at their highest level since late 2013, according to the Institute for Supply Management, and the ISM’s gauge of the services sector showed growth continuing, though at a slightly more moderate pace. Durable goods orders, especially business orders for capital equipment, rebounded from a May slump, and the Federal Reserve said U.S. manufacturing output rose for the fifth straight month.
• The housing market showed signs of fatigue. According to the Commerce Department, sales of new homes plunged more than 8% in June and were 11.5% lower than a year earlier. Home prices measured by the S&P/Case-Shiller 20-City Composite Index continued to improve, but the 9.4% increase over last May represented a slower pace than in April. And wet weather in the South helped slow housing starts by 9.3%. However, the National Association of Realtors^® said home resales were up 2.6% for the month.
• Both the European Union and the United States tried to increase pressure on Russia to end support for Ukrainian rebels by adopting new measures that are expected to affect Russian banks, the country’s oil industry, and the military.
• Higher gas prices helped send consumer inflation up 0.3% and wholesale prices up 0.4% in June. That put annual inflation rates at 2.1% (consumer) and 1.9% (wholesale), according to the Bureau of Labor Statistics. Meanwhile, retail sales rose 0.2% in June, though the Commerce Department doesn’t adjust the figures for price increases such as those seen in food costs.
• The Securities and Exchange Commission announced new rules governing money market mutual funds that are intended to guard against a sudden run on such funds. The rules, which will be implemented over time, will require a floating net asset value for funds serving institutional investors (those serving individuals will continue to strive for a stable $1 per share price, though there will continue to be no guarantees that they will always do so). The SEC also would allow non-governmental money market funds to impose restrictions during a crisis to deter withdrawals.

Eye on the Month Ahead

The dog days of August will likely keep trading volumes light, which can sometimes heighten volatility. The Federal Reserve will pause its Great Unwind of quantitative easing, likely picking up again in September, and global conflicts could continue to counterbalance any economic good news.

The Markets

In a week that saw mostly mixed economic data and generally positive earnings reports, markets posted mixed results as well. While tech and international stocks posted slight gains, the Dow Jones Industrial Average lost a little less than 1% after Friday’s 123-point drop. Small caps continued their slump, and the S&P 500 finished the week flat despite hitting new records mid-week.

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

• Consumer prices rose 0.3% in June. According to the Bureau of Labor Statistics, the increase was driven largely by higher gas prices, which rose 3.3% and accounted for two-thirds of the increase. By comparison, last month’s rise in inflation was more broad-based. Energy prices were mixed in June: electricity prices rose, while natural gas and fuel oil prices fell. Food prices rose modestly, while the index for all items except food and energy rose by a slight 0.1%. For the 12 months ended in June, inflation rose 2.1%.
• Existing-home sales climbed 2.6% in June, reported the National Association of Realtors® (NAR). At a seasonally adjusted annual rate of more than 5 million, sales are at their highest rate since October 2013. Inventories rose 2.2% to 2.3 million homes, indicating a 5.5-month supply at the current rate of sales. Lawrence Yun, NAR chief economist, said, “Inventories are at their highest level in over a year and price gains have slowed to much more welcoming levels in many parts of the country. This bodes well for rising home sales in the upcoming months as consumers are provided with more choices.”
• On the other hand, sales of new single-family homes plummeted by more than 8% in June from May, according to a report issued jointly by the U.S. Census Bureau and the Department of Housing and Urban Development. The seasonally adjusted rate of 406,000 homes was 11.5% lower than the June 2013 estimated figure.
• The Securities and Exchange Commission (SEC) announced amendments to the rules that govern money market mutual funds. According to a press release issued by the SEC, the amendments are intended to guard against a run on such funds in times of crisis, “while preserving the benefits of the funds.” The rules require a floating net asset value for prime money market funds serving an institutional client base. Prime money market funds serving individual investors will continue to strive for a stable $1 share price, although there can be no guarantees that such a price will be maintained. The new regulations also allow non-governmental money market funds to charge fees or impose other restrictions on investors attempting to withdraw funds during trying times. “This strong reform package will make our markets more resilient and enhance transparency and fairness of these products for America’s investor,” said Mary Jo White, SEC chairperson.
• In a move that surprised many observers, the Bank of Russia raised its key interest rate for the third time in five months. The central bank lifted the rate by 0.5% to 8% in a move intended to curb inflation, respond to continued geopolitical unrest, and perhaps stymie additional flight of capital resulting from any further economic sanctions.
• Unemployment insurance weekly claims (i.e., weekly jobless claims), were 284,000 for the week ending July 19. That was a decrease of 19,000 from the previous week and, more notable, the lowest level for initial claims since February 2006.

Eye on the Week Ahead

Next week, market watchers will keep an eye on manufacturing data, home prices, comments from the Fed, and the government’s initial estimates for second-quarter growth figures.

The Markets

U.S. stocks dropped sharply Thursday in response to the downing of a Malaysia Airlines commercial jet over Ukraine and the Israeli ground invasion of Gaza. However, most indexes bounced back Friday to end another week in positive territory. The exception was the Russell 2000 Index, which continued its decline perhaps aided by Fed Chairman Janet Yellen’s comments earlier in the week indicating that valuations in some small-cap sectors appear “substantially stretched.” Treasury yields dropped last week, while gold ended the week about 2% lower.

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

• Stocks tumbled Thursday in response to two major geopolitical events, the downing of Malaysia Airlines Flight 17 over Ukraine and Israel’s ground invasion of the Gaza Strip. Treasuries yields dropped and gold futures rose as investors sought safer havens.
• Retail and food sales rose 0.2% in June and were 4.3% higher than a year earlier. However, the Commerce Department does not adjust the numbers for price increases such as those seen in food costs in the last several months; not counting autos, which were down 0.3%, other retail sales were up 0.4% for the month.
• The Federal Reserve’s “beige book” report said most districts expect a continuation of generally steady growth seen at the end of last year. All districts reported year-over-year gains in manufacturing, and most also said retail sales had increased since the last report.
• Wholesale prices rose 0.4% in June, putting the wholesale inflation rate for the last 12 months at 1.9%. The Bureau of Labor Statistics said almost all of the monthly increase was the result of a 2.1% jump in energy costs resulting mostly from higher gas prices.
• Housing starts dropped by 9.3% in June from the previous month, according to a joint release issued by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development. The decrease stemmed from a nearly 30% drop in the South, where unusually wet weather hampered construction efforts. Other regions reported increases, including the Northeast, which was up 14.1%, and the Midwest, which rose 28.1%. Year-over-year, the index is up 7.5%.
• Manufacturing data was generally positive. The Federal Reserve said U.S. manufacturing output was up for the fifth straight month, while a 0.2% gain in industrial production meant production was up an annualized 5.5% during Q2 2014. Also, the Federal Reserve’s Empire State manufacturing survey rose for the third straight month, hitting its highest level in more than four years (25.6). The Philadelphia Fed Survey reported similar results. The index rose to 23.9 this month, its highest point since March 2011.
• The Conference Board Leading Economic Index rose 0.3% in June. Ataman Ozyildirim, a Conference Board economist, noted that increases over the last six months indicate an improving economy, which might even accelerate a bit in the second half. “Housing permits, the weakest indicator during this period, reflects some risk to this improving outlook. But favorable financial conditions, generally positive trends in the labor markets and the outlook for new orders in manufacturing have offset the housing market weaknesses over the past six months,” he said.
• The Justice Department announced that Citigroup had agreed to provide $200 million worth of financing for new affordable rental housing as part of a $7 billion settlement for misrepresenting mortgage-backed securities it packaged and sold leading up to the 2008 financial crisis. The agreement also includes a $4 billion civil penalty that the Department of Justice said represents the largest settlement under a federal law enacted as a result of actions by thrifts and savings and loan institutions in the 1980s.

Eye on the Week Ahead

This week, investors will likely keep a close eye on continuing geopolitical developments, as well as domestic reports on consumer inflation, existing and new home sales, and durable goods.