Markets Tumble on Fed Fears Weekly Update – August 4, 2014

Image courtesy of FreeDigitalPhotos.net/cooldesign

Image courtesy of FreeDigitalPhotos.net/cooldesign

Caution was the name of the game last week as equities tumbled, marking the worst weekly loss for the S&P 500 in two years. Though the week was packed with market moving events, most of the week’s losses can be attributed to worries that the Federal Reserve may raise interest rates sooner than expected. For the week, the S&P 500 lost 2.69%, the Dow fell 2.75%, and the Nasdaq slid 2.18%.1

Friday’s July jobs report showed 209,000 new jobs created during the month, well under the hoped-for 233,000 jobs. The headline unemployment rate also ticked upward to 6.2% from 6.1% in June.2 On the other hand, the low numbers came with some good news: Most of the new jobs were full-time, which is great news for workers trapped in low-paying or part-time jobs. It’s also potentially good news for future consumer spending.3

Investors also got their first look at second quarter Gross Domestic Product, which clocked in at a blistering 4.0% annualized growth, completely shattering even the most optimistic estimates.4 Let’s keep in mind that economic growth estimates are frequently updated as fresh data comes in, and we are likely to see that number change in future updates. Underpinning the surge in economic activity is a significant increase in consumer spending in Q2, which accounts for approximately 70% of economic activity in the U.S. With the labor market on the move, we can hope for greater consumer spending in the third and fourth quarters.5

The Federal Reserve’s Open Market Committee voted to continue tapering quantitative easing, noting that the economy is on a much firmer footing. Markets reacted negatively to the news, fearing an end to easy money. If you recall, investors were also spooked last year at the prospect of an end to the Fed’s lavish quantitative easing policies. Now that the end is nigh, markets are grappling with the reality that the Fed’s low rates are moving into the rearview mirror. Many analysts are calling it another case of “good news is getting to be bad news,” rather than signs of impending doom.6

Looking ahead, we can expect more volatility as earnings season continues and investors digest piles of economic data. It’s very possible that stocks will rebound from last week’s loss as investors “buy the dip,” but markets could also experience further losses. Let’s keep in mind that there are very few negative fundamentals underpinning last week’s decline: The economy is doing very well, the labor market is making great strides, and corporate earnings are up. Psychologically, market expectations have been pushed so high for so long that a pullback is natural. While we can’t predict market movements, we think that there is still plenty of possible upside this year.

If you have any questions about how recent events may be affecting your investments, please give us a call.

ECONOMIC CALENDAR:

 

Tuesday: Factory Orders, ISM Non-Mfg. Index

Wednesday: International Trade, EIA Petroleum Status Report

Thursday: Jobless Claims

Friday: Productivity and Costs

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HEADLINES:

U.S., EU back more sanctions against Russia. In a bid to halt Russia’s arming of Ukrainian separatists (and in response to the downing of flight MH17), western nations unveiled a third round of more severe sanctions targeting Russian finance, weapons, and energy industries.7

Argentina defaults on bond payments. Credit rating agency Standard & Poor’s declared Argentina in default after the government missed a $539 million payment to bondholders. Though long-term consequences of the default are unknown, they will likely result in higher interest rates on Argentinean debt and reduced access to international credit markets.8

Islamic State seizes fifth Iraqi oil field. Insurgents continued their offensive, seizing another oil field and Iraq’s largest dam. The Sunni militant group represents a serious threat to Iraq’s stability; however, since Iraq’s oilfields are concentrated far from the fighting, crude oil production remains largely unaffected.910

Consumer spending dips in July. Consumers felt less optimistic about jobs and income growth, pushing a measure of consumer expectations down for the third straight month. Despite recent improvements in the labor market, consumers are still concerned about their economic prospects.11

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