As in roulette, same is true of the stock trader, who will find that the expense of trading weights the dice heavily against him. – Benjamin Graham
After rising to all-time highs on Monday, the major stock averages fell back slightly and ended the week virtually flat as volume continued to remain relatively low. Lack of movement either up or down in stock prices was attributed to a paucity of economic data as well as fewer quarterly earnings reports. Without any significant news to trade on, investors were left to focus on the minutes from the most recent Federal Open Market Committee (FOMC) meeting. Although two Fed officials voted to hike interest rates, most of the members thought that the Fed should wait to receive more information before making a decision. Fed officials are mindful of the need to begin normalizing interest rates but must see further evidence of sustainable economic strength. Another strong jobs report in August, for example, might be the catalyst that they need to pull the trigger. Though economic data released last week was generally positive, it lacked the importance to impact stock prices in a meaningful way. On the earnings front, the news was mixed but several major retailers issued profit reports that exceeded expectations. Wal Mart reported its biggest same-store sales gain in four years while Home Depot and Target both beat quarterly earnings estimates, although the latter lowered its earnings guidance for the rest of the year. With earnings season nearing an end and uncertainty over a possible interest rate hike on investors’ minds, the market is likely to trade sideways for a period of time. Stocks are hovering near all-time highs and while valuations are stretched relative to historical data, they are not excessive based on comparisons with other past exuberant periods in the market. One could also make the argument that with interest rates at historic lows, stocks look attractive by comparison on a relative basis.
The consumer price index (CPI) for July was flat and reached a five-month low due to continued low energy prices. Housing starts in July rose to the second-highest level since the recession on strong demand for homes. Industrial production for July was also better than forecast and recorded the biggest increase in almost two years. Weekly jobless claims continued to remain at low levels, suggesting that the labor market is still on solid footing. Leading economic indicators for July were also slightly higher than forecast and portends moderate economic growth through the end of the year.
For the week, the Dow Jones Industrial Average slipped 0.1% to close at 18,552 while the S&P 500 Index dropped less than a point to close at 2,183. The Nasdaq Composite Index rose 0.1% to close at 5,238.
New home sales and existing home sales for July are forecast to be slightly lower than in June but still consistent with a steadily improving housing sector. After falling almost 4% in June, durable goods orders are expected to snap back in July and register a healthy increase. The second estimate of second quarter gross domestic product (GDP) should remain the same with disappointing growth of 1.2%.
The most anticipated event this week will be the speech by Federal Reserve Chair Janet Yellen at their annual conference in Jackson Hole, Wyoming as investors will be all ears on her comments about interest rates.
Among the most prominent companies scheduled to report earnings this week are Toll Brothers, J. M. Smucker, Best Buy, Williams-Sonoma, Dollar Tree, Dollar General, Tiffany & Co., HP and Medtronic.
The most anticipated event this week will occur on Friday as Federal Reserve Chair Janet Yellen addresses the annual Fed conference on the subject of monetary policy. Release last week of the Fed minutes from their most recent FOMC meeting indicates division among Fed officials over whether or not the Fed funds rate should be raised from its 0.25%-0.50% range. One of the biggest question marks that could determine a possible rate hike is the forecast for GDP growth in the third quarter. The Atlanta Fed’s prediction of 3.6% growth in the current quarter could trigger a preemptive rate hike by the Fed at their September meeting. But the uncertainty over a sustained pickup in growth following the weak second quarter GDP number and the uncertainty over the upcoming presidential election make the Fed’s decision difficult. While it’s hard to quantify the effect of the election on growth, it’s possible that at least 1% could be shaved off GDP. With so much at stake, the most likely scenario is that the Fed waits until December before raising interest rates followed by at least one other increase sometime in 2017 depending on the strength of the economy. Given the current fragility of the economy, it’s better to error on the side of caution rather than risk sending the economy into a recession.