Stocks post modest losses despite mostly favorable economic data

It’s very difficult for any particular segment of the stock market to sustain superior performance. The watch word for our financial markets is “reversion to the mean”, i.e. what goes up must come down, and it’s true more often than you can imagine. – John Bogle

Although the Dow Jones Industrial Average snapped its 5-day losing streak on Monday, it wasn’t able to sustain any positive momentum and closed slightly lower for the week. Both the S&P 500 Index and the Nasdaq Composite Index also posted modest losses for the second consecutive week even though economic data was mostly better than expected. All three major stock averages still remain within roughly 3% or less of their all-time highs. The week began with positive news from drug manufacturer Pfizer as it said that its vaccine could be authorized for children by the end of October. This news comes at a time when the Delta variant of Covid-19 appears to be receding as vaccinations coupled with immunity should translate into falling positive cases. Two important pieces of economic data released last week –the August consumer price index (CPI) and August retail sales – showed that inflation may be cooling and consumer spending may be picking up. Excluding food and energy, the core CPI only rose slightly for the month and was up 4% on a year-over-year basis, both less than forecast. Retail sales were expected to decline nearly 1% in August but, instead, actually increased by almost that same percentage as back-to-school shopping was much better than expected. Excluding automobiles, sales were much higher than anticipated and online sales were particularly strong with fears rising over the pandemic. But there were storm clouds on the horizon, too, as House Democrats proposed new tax hikes on corporations and wealthy individuals to fund a $3.5 trillion social safety net and climate policy bill. While passage of this bill is by no means certain, it comes at a time when the Federal Reserve meets this week to discuss the possibility of tapering its $120 billion a month bond purchases.

Last Week

Other favorable economic data last week was the University of Michigan consumer sentiment index for September, which was slightly higher than expected, and the New York Federal Reserve’s Empire Index, a measure of manufacturing in the region, which came in well ahead of expectations. The only negative piece of economic data was weekly jobless claims, which were 332,000, above the 320,000 that was forecast.

For the week, the Dow Jones Industrial Average dipped 0.1% to close at 34,584 while the S&P 500 Index fell 0.6% to close at 4,432. The Nasdaq Composite Index dropped 0.5% to close at 15,043.

This Week

Housing data will be the primary focus for investors this week as August existing home sales, new home sales and housing starts are all expected to show that the housing market remains strong. August leading economic indicators are forecast to increase but only by about half the amount they rose in July.

The Federal Open Market Committee (FOMC) meets and announces its monetary policy decision, which is expected to keep the federal funds interest rate unchanged at near zero. The Fed may also signal when it might begin to taper its monthly bond-buying program either later this year or next.

The most prominent companies scheduled to report their quarterly earnings this week are KB Home, Lennar, Adobe, AutoZone, FedEx, General Mills, Costco Wholesale and Nike.

Portfolio Strategy

With little in the way of key economic data this week outside of several housing reports and a light earnings calendar, the focus for investors will be squarely on the Federal Reserve. Fed officials are scheduled to meet on Tuesday and Wednesday followed by an announcement on their decision and a press conference with Fed Chairman Jerome Powell. The meeting comes at a critical time for the markets as the month of September has historically been a difficult one for stocks. The S&P 500 Index typically peaks around the middle of the month before weakness sets in that continues until the end of September. While investors know that the Fed plans to taper its $120,000 billion a month bond-buying program at some point in the future, the question remains as to the timing of such a move. Many observers expect the Fed to make an announcement about tapering at its November meeting and actually begin the process either by year-end or early in 2022. The delay has been due primarily to the much weaker than expected August employment report which showed that only 235,000 jobs had been created, about 500,000 jobs less than forecast. The spread of the Delta variant of Covid-19 has also been a setback as it has postponed a full reopening of the economy. Despite these concerns, it’s possible that the Federal Reserve might change its dot plot or forecast for planned interest rate hikes. Back in June, the Fed indicated that it would raise rates twice in 2023 and keep rates unchanged in 2022. A change in this forecast that would raise interest rates sooner could have a negative effect on the stock market. With risks rising and the deadline for raising the government debt ceiling fast approaching, the Fed will likely stick with its dovish tone and try to calm jittery markets.