Troubling economic reports and fears of Fed tapering caused markets to stumble early last week, though they regained their footing later in the week, eventually ending positive. For the week, the S&P 500 gained 0.78%, the Dow gained 0.88%, and the Nasdaq gained 0.39%.[i] International stocks had a bad week; the benchmark MSCI EAFE index dropped 1.14%[ii] as Asian equities took a beating. The Hong Kong stock market turned its worst weekly performance in more than a year as Chinese investors grappled with a cash squeeze and weak economic data.[iii]
The Dow dropped to its lowest level in a month last Wednesday after a series of weak economic reports caused a selloff. Factory orders increased less than forecast in April, growing just 1% after March’s 4.7% drop.[iv] A decrease in weekly mortgage applications also unnerved investors since the housing sector has been one of the key factors supporting the market rally. Applications for home loans dropped 11.5% from the previous week, though it’s possible tight housing supplies contributed to the decrease.[v]
On a more positive note, the May jobs report beat expectations, causing markets to rebound after a short decline. However, the underlying job trends point to a stable, not growing, labor market, meaning that we probably won’t see significant improvements in income levels or consumer spending this month. Nonfarm payrolls increased by 175,000 jobs in May, significantly improving upon April’s revised 149,000 new jobs. The headline unemployment rate ticked upwards to 7.6%, surprising analysts who had expected the rate to remain unchanged at 7.5%. However, the increase in unemployment was the result of an increase in the labor force, indicating that previously discouraged job searchers have enough confidence in the economy to start looking for jobs again.[vi]
While the increase in the headline unemployment rate surprised analysts, it suggests that the Fed will have to maintain its accommodative monetary policy in the coming months. Markets rose after Federal Reserve Bank of Atlanta President Dennis Lockhart said central bank officials are committed to continuing to support the economy.[vii]
Economic data is light this week, but analysts will be watching retail sales data and consumer sentiment numbers closely to see whether consumer spending is likely to increase this quarter. Despite relatively flat jobs data, some analysts[viii] believe that there is room for additional upside since a drop in gas prices, higher home prices, and increasing stock prices are contributing to improvements in consumer confidence and willingness to spend.
Wednesday: EIA Petroleum Status Report, Treasury Budget
Thursday: Jobless Claims, Retail Sales, Import and Export Prices, Business Inventories
Friday: Producer Price Index, Current Account, Industrial Production, Consumer Sentiment
Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov. International performance is represented by the MSCI EAFE Index. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.
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The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ.
The Nasdaq is a computerized system that facilitates trading and provides price quotations on some 5,000 of the more actively traded over-the-counter stocks