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Stocks Drop as September Rate Hike Looms

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PantagesStocks ended Friday on a down note which capped a weekly decline of 1.2% for the S&P 500. Both the Dow Jones Industrial Average and the NASDAQ fared worse and ended the week down 1.6%. The S&P still remains in positive territory for the year (up 2.1%) while the Dow is now negative for 2015 (down 1.1%).

In the bond market Treasury yields rose about six basis points for maturities ranging from six months to five years. This was a result of decent economic numbers which increased the chance of a Fed rate hike at the FOMC meeting next month. The ISM non-manufacturing index out on Wednesday came in at its highest level in almost a decade, while the monthly payrolls report on Friday showed another 215k jobs were created in July. The jobs data for the past two months was also revised slightly higher and monthly gains have now averaged 211k in 2015. Additionally, over the last 12 months more than 2.9 million jobs have been added to the U.S. economy.

At the other end of the bond spectrum the 30 year Treasury saw a decline in yield of 9 basis points for the week. The continued rout in commodities has kept inflation expectations low which supports longer term maturities. For the week WTI oil fell $3.25 to close at $43.97 per barrel while gold remained unchanged at $1,094 per ounce. Alaska North Slope crude closed at $48.37 per barrel.

Earnings season is winding down as 444 members of the S&P 500 have now reported. Roughly 70% of the companies that have reported have beaten estimates but earnings for the entire index still remain down 2% YoY. Excluding energy companies though, earnings are up 5.3% from Q2 2014.

The Athens Stock Exchange resumed trading Monday after being closed for five weeks and promptly fell more than 20%. The drop was largely expected. Greece’s top four banks plunged 30%. By weeks end the stock market was off 15%.

WSJ: “Puerto Rico missed a $58 million bond payment, the first default by the U.S. commonwealth in what may become one of the largest restructurings in the history of the $3.7 trillion market for debt sold by state and local governments.” Puerto Rico has $72 billion in debt outstanding. By comparison Detroit defaulted on $20 billion of debt.

This is astonishing: ISI reports that Amazon sales grew $5 billion in Q2, accounting for 25% of overall retail sales growth, which was $20 billion. (Not total retail sales, but the growth in sales. Still, a big number.)

The WSJ had an interesting article on silver. It has sold off more than gold having touched $48 an ounce in 2011 and is now trading at $15. Investment demand for both precious metals comes from their historical role as a safe haven asset and a store of value against inflation. With inflation virtually nonexistent there is little need for such a commodity. And with rates poised to rise the opportunity cost of holding these zero-yielding assets is going up. Add to that the

long lead times in commodity production which have led to excess capacity in many commodities and now the gluts are continuing to push prices lower.

I’m off to Austin, Texas for a week long break. Temperature forecast for the next week – at least 100 degrees every day! What was I thinking when planning this trip?

Jeff Pantages, CFA®
Chief Investment Officer

 

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