All signs last week pointed to a hobbled U.S. economic recovery and lower interest rates for longer. Stocks basked in the mediocrity.
The Dow Jones Industrial Average rose 97 points, or 0.5%, to 18,491.96—just 0.8% below its record close. The Standard & Poor’s 500 index rose to 2179.98. The Nasdaq Composite rose 0.6%, to 5249.90. Trading was as light as a pair of flip-flops padding around a beach in the Hamptons. Volume on the New York Stock Exchange hit 2.6 billion shares on Monday, the lowest for a full day for the year.
Data released last week showed that job growth limped forward in August, manufacturing unexpectedly contracted, and inflation stayed muted. Strategists and economists agreed that the new data undercuts the case for a September rate hike by the Federal Reserve.
The U.S. added 151,000 jobs in August, less than the 180,000 that economists had expected and below July’s 275,000. Wages limped ahead by 0.1%, and the average workweek contracted slightly. Investors tend to look skeptically at August reports, which include more seasonal adjustments than other months. “We’re in the sweet spot,” says Brad McMillan, chief investment officer at Commonwealth Financial Network. “It wasn’t bad, but it should keep the Fed from raising rates. So we have growth and a few more months of monetary stimulus. You can’t ask for more than that.”
Manufacturing also slumped. The Institute for Supply Management said Thursday that its manufacturing index fell to 49.4 in August, well below the expected 52. Anything below 50 indicates the manufacturing sector is declining. Weakness in manufacturing sometimes heralds a recession, but Michael Shaoul, CEO of Marketfield Asset Management, wrote that manufacturing is “stagnating” because the economy is shifting more quickly toward service jobs. The weakness shows “a narrowing of the economic base into service and a portion of the industrial economy.”
Inflation data gave investors more confidence that the Fed will hold off. A report on personal consumption expenditures indicated that inflation has stayed steady at a core annual rate of 1.6%, still below the Fed’s target.
That said, investors do appear ready for a rate hike, according to Jim Paulsen, chief investment officer at Wells Capital Management.
“I think this suggests that the bond market is continuing to price in a near-term rate hike by the Fed,” he wrote. “If the bond market felt the job numbers pushed back the Fed until December, I doubt yields would have risen today. And that is also the message coming today from stocks, commodities, and the U.S. dollar.”
Oil prices slumped last week more than they have in any week since early July, with futures falling 6.7% to $44.44 a barrel. Investors continue to fret about oversupply in the industry as crude stockpiles grew unexpectedly. And there are more indications that drillers are ramping up again, as unemployment in the energy and mining sector fell to 5.4% in August from 9.3% in July. “The negative effects of lower oil prices on the energy sector are behind us,” wrote Deutsche Bank economist Torsten Slok.
(Source: Barrons Online)