Summer doldrums impact stocks
Profit-taking was the call of the week. Every attempt at a rally was turned back within a day or so. The good news is that we should expect a relief bounce shortly.
Earnings are winding down but there were plenty of other events that kept investors busy. Moody's, one of the three big credit agencies, downgraded 10 small to mid-sized banks citing growing financial risks that could impact their profitability. Even more troubling to traders, was a warning that some of the nation's biggest lenders might also receive potential downgrades. Credit risk is a bad word in financial markets and the banking sector took a tumble on the news and took the overall market down with them.
And then we had the U.S. Treasury's bond auctions. Tuesday's 42 billion sale of three-year notes produced a lower-than-expected yield, which was a sign that demand was stronger than anticipated. Wednesday's sale of $38 billion of ten-year notes was so-so and Thursday's auction of $23 billion in 30-year bonds was less than stellar. The overall results of the auctions put downward pressure on markets as more than $100 billion of liquidity was drained from the market.
On the plus side, weekly U.S. jobless claims spiked to the highest level in a month. The total number of people collecting unemployment insurance for the week increased from 21,000 to 248,000 from the prior week, however continuing claims declined, which is not what the Federal Reserve wants to see.
July's Consumer Price Index came in as expected. Core CPI (ex-food and energy) increased 0.2%, while on a year-over-year basis core prices increased 4.7% down from 4.8% in June.
However, the Producer Price Index rose 0.8% year-over-year and increased monthly by 0.3%. Those numbers were above estimates and negated any positives the CPI may have given investors. The data simply confused investors and gave no real direction on the inflation front.
The question is whether there has been enough progress on the inflation front for the Fed to pause their rate hikes in September when the Federal Open Market Committee meets again. We still have another month's worth of data to uncover before that happens so expect the markets to be held hostage by the macroeconomic data.
As readers are aware, over the last week or two I expected rough going in August into September. So far, that call has been correct. There are plenty of head fake moves coming up. Next week, for example, I expect the markets to bounce with the S&P 500 Index possibly spiking to the 4,650-4,700 area. Most traders and media pundits will then announce that the pullback is over. Don't believe it.
I expect those gains will be fleeting at best. Into late August or early September, there will likely be a more serious decline that will take us down to the 4,200 area. Those kinds of moves will not sit well with most investors. My suggestion is to step away, not check your retirement accounts and do something else until this is over.
As promised, yesterday's column "Pullbacks are normal, so keep those emotions in check" is a must-read for everyone. Given the market environment we find ourselves in, it might help you to weather this squall.
Bill Schmick is a founding partner of Onota Partners, Inc., in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners, Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or e-mail him at bill@schmicksretiredinvestor.com .Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal.