A somewhat peculiar last day of August topped off a typical late August “silly season” week and a somewhat unusual August overall. Stock prices typically float higher during the ten or so trading days around the last week of August and the days leading up to Labor Day, but the holiday is early this year, being the first day of the month. The silly season move could fade by Wednesday or Thursday of the coming week week (stocks usually rally the day after Labor Day) – or even sooner if Mr. Putin gets to feeling any friskier.
It was an odd sensation on Friday to see the front page of the Wall Street Journal showing photos of a Russian invasion of the Ukraine (the Russian foreign minister dismissed the pictures as faked “computer games”), while seeing the futures market up at the same time. The day was made even more glorious before the open by a disappointing July income and spending report, the weakest since the beginning of the year, and so of course stocks opened higher and finished with the S&P 500 at another all-time high. At least markets had the decency to sag a few basis points for about an hour in reaction to the news; the rest was the reaction to the need to paint the tape for the last day of the month.
It fit with a week that boasted the first four days being the lightest four trading days of the year (which didn’t bother the Dow’s triple-digit rally on Monday, the second such Monday in a row), then Friday having above-average volume as the battle to position the month-end tape prices heated up. Shades of 2012, when stock market gains came almost entirely from end-of-month markups.
August is not one of the market’s better months as a rule, but this one was the best for the S&P 500 (+3.77%) since the year 2000 – not such a fabulous memory, since every month afterwards in 2000 was down.
As for August 2014 – a month that began with a rebound from the near two-year old QE-3 trend line and more or less kept going – it wasn’t great earnings or economic news that was firing up traders. Two of the best days were the last two Mondays of the month, when the absence of any Russian nuclear bombing in the Ukraine seemed to be the occasion for hugely festive rallies on extremely thin volume. In short, it was a robot-trading driven month birthed by a chart rebound. I would not take it as a sign of September’s direction, neither up nor down, indeed not as a sign of anything but how artificial the modern market can get. Things should get a lot more exciting over the next couple of months, probably not all for the best.
Enjoy your Labor Day holiday and remember that all US markets and banks are closed on Monday, September 1st.
The Economic Beat
The two most interesting reports of the week were the initial July estimates for durable goods orders and personal income and spending. The main message of the durable goods report was two-fold: one, Boeing (NYSE:BA) booked a whole lot of airplane sales at the recent air show in Europe; and two, don’t read too much into the initial durable goods data for any given month: The revisions can be huge.
New orders were up over 22% with Boeing’s order book included, and down 0.8% excluding the transportation category in general. Maybe. The prior month was revised from +0.8% to +3.0% for the category, and I might not bet my life on the finality of that number either. Business cap-ex spending might have been down 0.5%, or it might not have been, as June had a whopping revision also. Motor vehicle orders were up over 10%, which probably was close to reality, as it dovetailed with the big spike in the heavily auto-influenced Chicago purchasing manager’s index (PMI), up from 52.6 to 64.3.
Outside of Chicago, monthly manufacturing survey figures were lower in Dallas and Kansas City, but rose in the Richmond district. The ISM national figure comes out Tuesday, and should comfortably be in the mid- to upper 50s (50 is neutral)
Personal income rose 0.2% against consensus expectations for 0.3%, and spending fell (-0.1%). Both of those numbers could get revised too, but the spending number does fit with the July retail sales figure that showed no change from June. Ironically, the year-on-year growth rate in disposable real income rose to 2.6%. Spending should get a boost in August, as it appears from the weekly retail sales figures that back-to-school spending is comfortably on track.
Housing continues to struggle against the headwinds of tight credit and previous price gains: The new home sales rate eased in June (412K) and price gains in existing homes also fell, taking the year-on-year rate down to 8.1%. Considering the magnitude of the bubble that preceded it, the only surprise in the data may be the number of people who preached housing would bounce back as if nothing happened.
GDP for the second quarter was revised up to 4.2%, reflecting an increase in non-residential fixed investment. That category is another one that is built on small estimates and subject to big revisions, so the final verdict may not be in. In the end, the roughly 4% rate is not so big of a rebound from the 2% drop recorded in the first quarter. I continue to expect that real GDP for the year will finish close to 2% for the fourth year in a row.
The big report next week is of course the jobs report on Friday. Consensus is for 220,000, though many seem to be expecting a higher figure. Going by weekly claims data, 220K looks about right. Besides the ISM manufacturing report on Tuesday, other highlights include the non-manufacturing survey on Thursday and the ADP payroll report Wednesday. Also on the docket are various global PMI readings, construction spending (Tuesday), foreign trade (Thursday), and the Fed’s Beige Book (Wednesday).