The Market Drifts Along Awaiting New Major Events This Week

One could say that the stock market has a case of the summer doldrums, as after making new all-time highs in the Dow Jones Industrial Average and the S&P two weeks ago and last week respectively, things have come down a bit from those best-ever levels and equities just seem to be drifting in narrow ranges with no great further upside or downside motivation.

In fact, the market has been so lacking in direction that the “explanations” for price movements have become somewhat formulaic, as for instance on down days the “experts” tell us that investors are worried about Cold War-like tensions in eastern Ukraine, while other trouble spots such as Gaza and Iraq are also being watched.

Then on days when stocks do better, investors are told that the market looks good because second-quarter earnings results have, by and large, come in better than expectations, the Federal Reserve has promised to keep interest rates low for an extended period of time and the economy is showing signs of improvement.

The upshot of all this is a market where the major averages have gone nowhere lately, as for instance the Dow was lower last week while the Nasdaq was higher and the S&P was virtually unchanged. The new week started on Monday with the exact opposite pattern, where the Dow ended up a bit, the Nasdaq was lower and the S&P once again ended with the smallest possible movement of being higher by less than one point, which was exactly how it ended the entire week before this one.

On the other hand, individual stocks have been doing well or poorly as the case may be, and this has primarily been the result of strong second-quarter profits, merger and acquisition activity, or promising developments in the pharmaceutical field. The first group would include stocks such as AAPL, CMG and FB, all of which have hit record all-time highs or are close to them with the case of AAPL. The second group would include companies such as FDO and TRLA, while PBYI rose by more than 300 percent in one day after successful test results from its cancer drug.

Just as there have been big successes lately, there have been stocks that reacted poorly after their results were announced. In fact, the reason that the Dow lagged after the rest of the market last week was that selloffs in some of its highest-priced members pushed it lower on a few days. Let us remember that this is a price-weighted index so that they have the most disproportionate effect when they make a large move. This group included BA, CAT and V, whose loss alone accounted for an astounding 60 points of the Dow’s 123-point selloff last Friday.

Economic reports released recently have followed the same pattern that we have seen for months now, showing an economy that is trying to make a better recovery but is hampered to some extent by recent softness in the housing market. June existing home sales rose by 2.6 percent to an eight-month high, but June pending home sales, which include signed contracts but no mortgage approvals yet, fell by 1.1 percent after having risen by 6 percent in May.

Weekly jobless claims declined to 284,000, the lowest level in more than eight years, and June durable goods orders increased by 0.7 percent after having declined by one percent in May.

There are some potential events that might or might not knock the major averages out of their current complacency and two of them take place today. The first one is the release of the initial estimate for second-quarter G.D.P. The reason that this is such an important event is that it follows the miserable final reading for economic performance during the first three months of the year, which showed an astounding decline of 2.9 percent.

As is widely known by now, awful weather in many parts of the country was partly responsible for the downturn, and it will not be a factor this time around. In addition, inventory buildup should help the total as well. Ironically, the consensus is for another 2.9 percent number, but this time it will be to the upside, which basically means that the economy stood still in the first six months of the year. The major concern is that investors are now worried that the springboard for an improvement in business spending might not be as powerful as once thought.

The second major event today is the release of the minutes of the latest F.O.M.C. meeting at which the Federal Reserve will almost surely announce a further $10 billion-a-month cut down to $25 billion of bond buying stimulus. This will keep the central bank on track to end this program entirely in October and then naturally the focus becomes when will they begin to raise interest rates from the zero to one-quarter percent level that has been in effect since December 2008.

This has been the subject of endless debate among members of the Fed itself and various experts in the investment community and the feeling is that the first increase will take place sometime between the middle and the third quarter of next year.

The final major event this week will take place on Friday with the release of the July non-farm payroll report. It is currently estimated that around 235,000 jobs were added last month as compared to June’s 288,000. This would be the sixth month of 200,000 plus growth, the first time this has taken place in almost 15 years. The unemployment rate is expected to decline to 6 percent from its current level of 6.1 percent, which gets it to the new lower Fed threshold of considering interest rate hikes.

Meanwhile, the second-quarter earnings season continues to plod along, and of the 230 S&P companies that have reported, 69 percent of them have beaten their estimates and the projection now is for a profit gain of six percent, while these companies have reported revenue growth of 3.3 percent that has beaten consensus in 63 percent of the cases. This week we hear from an additional 140 S&P companies.

So between the three blockbuster events as mentioned and the ongoing earnings background, investors will have plenty to pay attention to and all of this will be discussed in next week’s column.

This report is for informational purposes only. It is not intended to be, nor should it be inferred as, a recommendation to purchase, sell, hold or sell short any security, or engage in any securities or commodities related transaction. Before entering into ANY investment, one should consult a financial professional.