After all, the chief business of the American people is business. They are profoundly concerned with producing, buying, selling, investing and prospering in the world. – Calvin Coolidge
Despite a strong employment report on Friday that led to an explosive rally in the stock market, the S&P 500 Index finished the week in the red on weaker than expected economic data, geopolitical concerns and sluggish growth in Europe and Japan. With the major stock averages down about 4% from their recent all-time highs and the Russell 2000 Index of small cap stocks down over 10% from its high, stocks staged a furious rally on the heels of a better than expected jobs report. The government announced that 248,000 new jobs were created in September and also revised upward the prior two months to show an increase of an additional 69,000 jobs. The headline unemployment rate also improved to 5.9% from 6.1% in August, although this decline was largely the result of fewer people looking for work and a lower labor participation rate. The jobs data was welcome news and could be described as the Goldilocks report as it was neither too hot nor too cold as wage growth continued to be virtually flat. With no appreciable increase in wages, inflation will likely remain subdued and the Fed will not be forced to raise interest rates as quickly. But most of the economic data announced last week was softer than expected and caused investors to question the strength of the economy. Confidence was also shaken on news of protests in Hong Kong, ongoing worries about the Islamic State, tensions between Russia and Ukraine and the first confirmed case of Ebola in this country. Continued economic weakness in Europe and Japan and concern over a possible slowdown in China only added to investors’ anxiety level. The next big hurdle for the market will be the third quarter earnings season, which begins in earnest this week.
Housing data last week was weaker than expected as August pending home sales and construction spending each fell about 1% and the S&P/Case-Shiller Index of home prices rose less than expected. While home prices are still rising, they’re rising at a slower rate. Manufacturing data was also weaker than expected as the ISM manufacturing index and the Chicago purchasing managers index (PMI) both fell slightly and US. factory orders dropped 10% on far fewer aircraft orders. Though modestly weaker in September than August, manufacturing nevertheless continues to expand at a healthy rate.
To add insult to injury in a mostly lackluster week for economic data, consumer sentiment also dropped as consumers became more pessimistic about the economy with regard to the outlook for jobs and slower economic growth in the future. European Central Bank President Mario Draghi echoed those sentiments by saying that weak economic growth in Europe and geopolitical risks could hurt confidence.
For the week, the Dow Jones Industrial Average lost 0.6% to close at 17,009 while the S&P 500 Index dropped 0.8% to close at 1,967. The Nasdaq Composite Index also fell 0.8% to close at 4,475.
Only three pieces of economic data are due to be released this week and none of them are significant or influential for the markets. The Federal Reserve releases minutes from its September meeting and investors will have an opportunity to dissect the report for clues about the Fed’s thinking on monetary policy and the timing of potential interest rate hikes.
The most notable companies due to report third quarter earnings this week include Alcoa, Yum Brands, Safeway, Monsanto, Costco Wholesale and Pepsico.
While the 1.3% decline in the S&P 500 Index on Wednesday was enough to rattle most investors last week, the market’s resiliency and ability to bounce back in the face of so much global uncertainty was never more evident. Investors have been trained to purchase stocks on weakness and buy the dips and that mindset was on display again last week. With oil and commodity prices falling, bond prices rising and yields declining and developed markets in Europe and Japan struggling to grow their economies, U.S. stocks look like the best asset class and offer the most value. Statistics also show that a 1% or more decline in stocks on the first trading day of October usually bodes well for the rest of the year. In fact, after such a substantial drop, the S&P 500 Index almost invariably rises through year-end with an average gain of over 7%. With most analysts forecasting that companies in the S&P 500 Index will post third quarter earnings growth of about 4.5% and revenue growth of about 3.5%, there is reason for investors in stocks to be optimistic about the fourth quarter. Research also shows that the stock market performs well during years in which mid-term elections are held. So while investors may be tempted to cut and run based on the latest scary headlines, it’s best to take a long-term perspective and have a well-diversified portfolio that is strategically rebalanced in order to weather any market volatility.