The best investment you can make is an investment in yourself…The more you learn, the more you’ll earn. – Warren Buffett
The S&P 500 Index had its weekly winning streak snapped at four as it closed slightly lower on weak trading volume but remains within two points of its all-time high. The best performing stock market average was the Nasdaq Composite, which rose over 1% last week on better than expected technology earnings. Along with the Dow Jones Industrial Average, all three of these major stock market averages posted gains for the month of July. Although second quarter corporate earnings continue to be surprisingly strong relative to expectations, it was the technology sector that really impressed investors last week. Apple announced on Tuesday that revenues and earnings beat analysts’ estimates and Amazon.com and Alphabet (parent company of Google) reported numbers on Friday that beat on both the top and bottom lines. It was these strong earnings reports that enabled the Nasdaq 100 to close at an all-time high. The other big news story was the Federal Open Market Committee (FOMC) meeting and, as expected, the Fed decided to leave interest rates unchanged. In their comments, Fed officials noted that the labor market has strengthened but that inflation has remained stubbornly low. They also acknowledged that consumer spending has increased but that business investment has been soft. The overall tone of the Fed’s remarks was positive as their statement reflected better economic conditions, but they also remained cautious on the near-term outlook. As it turned out, this cautiousness was warranted. Second quarter gross domestic product (GDP) released on Friday increased only 1.2%, well-below expectations of 2.5% growth. To add insult to injury, first quarter GDP was also revised lower, from 1.1% to 0.8%, as this flattish growth indicates that the economy continues to struggle. These weak reports certainly lessened the chance of an interest rate hike in September, just when many people were thinking a rate hike was a distinct possibility after stronger economic data recently.
Including the disappointing second quarter GDP number, economic data released last week was a mixed bag. Other weak reports were June durable goods orders, which fell 4% and was the largest drop in orders in almost two years. Weekly jobless claims also rose but the underlying trend still signals a strong labor market. On the bright side, new single-family home sales topped expectations and were at the highest level since February 2008. June automobile sales were also strong and consumer spending increased over 4% in the second quarter. Finally, the Chicago purchasing managers index (PMI) in July was solidly in expansion territory.
The technology sector also received a boost from merger and acquisition activity last week as Verizon announced it would acquire Yahoo, Oracle agreed to purchase NetSuite and Analog Devices reached a deal to buy Linear Technology.
For the week, the Dow Jones Industrial Average lost 0.7% to close at 18,432 while the S&P 500 Index slipped 0.1% to close at 2,173. The Nasdaq Composite Index gained 1.2% to close at 5,162.
June construction spending is expected to increase modestly while June factory orders are forecast to fall and be worse than the previous month. The July ISM manufacturing PMI should repeat its 53 reading in June and indicate continued strength in the manufacturing sector. The most important piece of economic data will be the July employment report due out on Friday, with most economists calling for about 175,000 new jobs and the unemployment rate ticking lower to 4.8%.
In overseas news, the Bank of England meets to review its interest rate policy and indications are that the bank will cut rates for the first time since 2009. Japan’s cabinet will also decide the fate of the recent stimulus package put forth by its prime minister.
Among the blue chip companies scheduled to report earnings this week are Procter & Gamble, Archer Daniels Midland, Kellogg, American International Group, Allstate, MetLife, Pfizer, CVS Health, Time Warner, Occidental Petroleum, Duke Energy, Devon Energy and Berkshire Hathaway.
After last week’s mostly positive statement on the state of the U.S. economy by the Federal Reserve, it seemed that an interest rate hike at its September meeting was back on the table. Then came the release of second quarter GDP and revised first quarter GDP numbers and realization that gross domestic product only grew by a paltry 1% in the first half of the year and all bets were off. This anemic growth coupled with falling oil prices caused by higher inventories sent the yield on the 10-year Treasury skidding to 1.46%. Crude oil is now down 20% from its 2016 high, technically entering a bear market, and one of the main reasons that inflation is running below the Federal Reserve’s 2% target. As much as the Fed would like to raise interest rates and normalize monetary policy, negative interest rates in Europe and the prospect of additional stimulus measures by Japan only compound the problem and make the Fed’s job that much more difficult. With September presumably off the table again and the Fed reluctant to hike interest rates ahead of the November presidential election, it appears that December may be the best chance for lift-off, although even that is by no means certain unless economic growth accelerates and inflation picks up.