We have been saying that this is the ‘Teflon market’ for the past couple of years. It seems like nothing negative really ‘sticks’ to the market. However, the past couple of weeks, the overall negativity has been ‘sticking’ to the market and has caused a downdraft.
Last Friday, this market reminded me of the old Frankenstein movies. Just when you thought Frankenstein was dead, he would get up again (and again). Many pundits thought this market was ‘dead’ as well with so many negative headlines. And yet on Friday, the markets much like Frankenstein, were back on their feet.
Earnings, Jobs, and the Geopolitical Picture
The second quarter earnings are just about completed, and they were better than expected. Also, low interest rates have attracted investors to stocks in the first place, remain low.
Markets regained steam and ended the first full week of August on a strong note. Solid jobs data and hopes that Russia may be de-escalating the Ukrainian conflict contributed to the gains. For the week, the S&P 500 gained 0.33%, the Dow grew 0.37%, and the Nasdaq added 0.42%.1
The labor market continues to gain ground and weekly unemployment claims tumbled. The four-week moving average, a less-volatile measure of unemployment, fell to the lowest level since 2006. Even better, measures of long-term unemployment are also improving as steady hiring improves conditions for jobseekers.2
Global security worries continued to dog investors when President Obama announced strikes in Iraq against Islamic State militants. While it’s too soon to know whether U.S. intervention will escalate or reduce tensions, markets reacted nervously to fears that the U.S. may be dragged back into Iraq. On the other hand, Russia announced an end to military operations on the Ukrainian border, giving us hope that Russia may be interested in turning down the heat on the conflict.3 Overall, the geopolitical situation hasn’t changed drastically, and we can expect continued volatility as markets weigh risks.
The bulk of earnings season is behind us, and we’re comfortable saying that Q2 was very positive for businesses. Growth rates are up, companies are beating their estimates, and demand is coming back. As of Friday morning, total earnings for the 453 S&P 500 companies that reported in are up 8.7% from second quarter 2013 on revenue growth of 4.6%.4
Forward guidance about the third quarter is also cautiously optimistic, with some firms talking up their business outlook. While low guidance is still the norm – firms prefer to set a low bar and then try to exceed it – the number of firms reducing their earnings guidance is down from last year. All told, it sounds like business leaders are feeling much better about their chances.5
Looking ahead at this week, investors will be looking carefully at retail sales and consumer sentiment data to gauge how strong economic activity is likely to be in the third quarter. The back-to-school season is upon us and will be a major test for retailers battling low store traffic and bargain-hunting shoppers. The back-to-school season is second only to the holiday shopping season in importance and is also a key indicator of consumer spending.6
1 http://goo.gl/Apuu1g
2 http://www.cnbc.com/id/101902387
3 http://www.cnbc.com/id/101906115
4 http://www.zacks.com/commentary/33849/tough-earnings-environment-for-retail-sector
5 http://www.zacks.com/commentary/33813/q3-earnings-estimates-not-falling-as-much
6 http://www.pewresearch.org/fact-tank/2013/08/14/economic-impact-of-back-to-school-shopping-a-matter-of-debate/
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