The Nitty Gritty Details:
U.S. stocks opened slightly higher this morning as markets attempt to recover from Wednesday’s losses. Investors have several more data points to digest today to help gauge how much the economy has actually slowed, including weekly jobless claims, factory orders and May chain store sales. European markets, which continue to be dominated by speculation of what’s next for Greece, were lower in mid-day trading overseas, while key Asian markets closed lower by between 1 and 2% in response to yesterday’s weak U.S. data. The euro is receiving some support against the dollar on reports that Greece has agreed to more austerity measures. Commodities are mixed with agriculture mostly higher, crude and natural gas up slightly, and metals flat-to-down. Oil’s gains are being capped by comments from an OPEC official that it might increase supply amid a weaker dollar.
Looking back at Wednesday, U.S. stocks sold off sharply, losing over 2% in the biggest one-day drop since February. The sell-off was driven by two disappointing key data points – the ISM Manufacturing Index and the ADP report on private sector jobs. All ten S&P sectors were lower while Treasuries, the US dollar and gold were about the only places to hide. Financials were a big loser on the weak jobs number, as the yield curve flattened and the 10-year Treasury yield broke below 3%. Commodities were broadly lower, with the exception of gold, though the broad indexes lost 100 basis points less than stocks.
Around our financial planning firm this morning, we were discussing three items that we thought would be of particular interest to our readers:
The Markets Broken Down:
- The economic data continues to disappoint, but does not suggest a double-dip recession. Wednesday’s batch of economic data for May (ISM, construction spending, ADP employment, vehicle sales) was, on balance, a disappointment relative to lofty expectations. On an absolute basis, the data released Wednesday (along with this morning’s report on initial filings for unemployment insurance for the last week of May and chain store sales for May) still suggest that the economy is in a soft spot, not spiraling toward another recession. In our view, severe weather, the ongoing reverberations in the global supply chain due to the Japanese earthquake, and the late Easter account for a sizable portion of the weakness in the May data, suggesting that the market generally underestimated the impact of these events on the economy. Looking ahead, the data released in June and early July may continue to reflect the weather and Japan-related weakness. Teacher layoffs and an earlier-than-usual shutdown of auto plants for summer retooling, will also put downward pressure on the data for June. These items weighing on the data should begin to lift in July and August.
- Why has the market not pulled back further given recent weakness in economic data? Stocks have been more resilient given the stronger business spending environment. S&P 500 companies have more revenue tied to business spending than the economy. GDP is driven much more by consumer spending, which faces more headwinds. Despite yesterday’s drop, the S&P 500 is still up about 5% this year.Most retailers missed May expectations. A still challenging consumer spending environment and bad weather weighed on retailers’ results for May as 15 out of 24 reporting retailers missed sales targets. Overall, sales missed expectations for a 5% year-over-year increase by about 1%. Gasoline sales and value-conscious shoppers supported wholesale clubs, while the more discretionary retailers and those targeting lower-end consumers overwhelmingly missed expectations.
- Treasuries rallied sharply on yesterday’s weak economic data, pushing yields to their lowest levels of the year, as the benchmark 10-year note yield fell below a key resistance level of 3%. Treasuries are giving up some of those gains this morning as the market sets up for next week’s 3-, 10- and 30-year auctions, sizes of which will be announced later today. Moody’s downgraded Greece’s debt rating to Caa1 from B1, a level that implies a 50% probability of default, according to the rating agency. Credit default swaps on Greece rose to a new record high of 1,461 basis points. Weakness across peripheral European government bonds was somewhat limited, as Spain conducted a successful auction of 4 billion euros worth of 3- and 4-year notes.
As always, email me here with your questions or comments. I love to hear from you and thoroughly enjoy the “intellectual debate” with our clients and friends that these opinions generate.
Greg Powell, CIMA
Note: The opinions voiced in this material are for general information and are not intended to be specific advice. Any indices such as the S & P 500 can’t be invested into directly. Past performance is no assurance of a future result.
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