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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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The Week In Review

7/29/16

The stock market ended a bouncy week on a flat note as the S&P 500 (+0.2%) clawed back to little changed for the week (-0.1%). The Nasdaq Composite (+0.1%) also settled just above its flat line, but gained 1.2% for the week. True to this week's form, the Dow Jones Industrial Average (-0.1%) underperformed, extending its weekly decline to 0.8%. The Dow, S&P 500, and Nasdaq posted respective July gains of 2.8%, 3.6%, and 6.6%.
 
The S&P 500 settled near last Friday's closing level, but not before marking a fresh intraday record high at 2177.09. Strikingly, that record high was established after the release of disappointing growth data for the second quarter.
 
Dollar weakness was among the residual undertones from the overnight session after the Bank of Japan underwhelmed stimulus-hungry investors; however, greenback softness promptly set the tone for the U.S. cash session after second-quarter GDP (1.2%; Briefing.com consensus 2.6%) missed estimates by a wide margin. First-quarter GDP was revised down to 0.8% from 1.1%.
 
The Dollar Index (95.51, -1.18) slumped to levels from early July on the back of a 3.0% surge in the yen (102.10). The swoon opened the door for dollar-denominated crude oil to rally, in turn improving sentiment in the broader market. Furthermore, the intraday strength in oil helped the energy sector (+0.7%) overcome a 1.4% loss in ExxonMobil (XOM 88.95, -1.25) after the energy giant reported below-consensus quarterly results. ExxonMobil's disappointing results contributed to the daylong underperformance in the Dow while other influential Dow components like Goldman Sachs (GS 158.81, -1.72) and Travelers (TRV 116.22, -1.39) lost 1.1% and 1.2%, respectively.
 
The financial sector (-0.2%) was one of just two cyclical groups that settled in negative territory. Industrials (-0.3%) also underperformed, but gained 3.4% in July. Similarly, the financial sector gained 3.4% for the month while top-weighted technology led the way with a 7.8% spike.
 
Outperformance in the technology sector was on full display earlier in the week, but Friday's affair did include the release of Alphabet's (GOOGL 791.34, +25.50) upbeat results that were met with a 3.3% spike in the stock.
 
In a way, the Friday uptick can be tied back to the expectation that the Federal Reserve will remain accommodative in its approach to monetary policy, given lagging growth. The likelihood of a rate hike, as estimated by the fed funds futures market, declined to 33.0% from last week's 47.8%.
 
Weak growth data sparked a bid across the Treasury complex, sending the 10-yr yield lower by four basis points to 1.46%.
 
Participation was boosted by month-end flows, which resulted in more than 1.1 billion shares changing hands at the NYSE floor.
 
Economic data included Q2 GDP, Employment Cost Index, Chicago PMI, and Michigan Sentiment:
•The advance estimate for second quarter GDP showed output increasing at an annual rate of just 1.2% (Briefing.com consensus 2.6%) on the heels of a downwardly revised 0.8% increase (from 1.1%) in the first quarter ◦The price deflator was 2.2% (Briefing.com consensus 1.9%)
◦Real final sales, which exclude the change in inventories, were up 2.4%
◦Personal consumption expenditures (PCE) increased 4.2%, which was the strongest gain since the fourth quarter of 2014. That gain accounted for nearly all of the growth in the second quarter, contributing 2.83 percentage points. Net exports contributed 0.23 percentage points
 
•On a seasonally adjusted basis, compensation costs for civilian workers increased 0.6% in the second quarter, which was in-line with the Briefing.com consensus estimate and the same rate of increase registered in the first quarter ◦Wages and salaries, which make up about 70% of compensation costs, rose 0.6% in the second quarter while benefits, which make up the remaining portion of compensation costs, jumped 0.5%
 
•The Chicago Purchasing Managers Index (PMI) dipped to 55.8 in July from 56.8 in June, which was better than the Briefing.com consensus estimate (54.0) ◦The report indicated that this was the first time since January 2015 that all five barometer components were in expansionary territory (above 50.0)
 
•The final reading of the University of Michigan Consumer Sentiment report for July checked in at 90.0, down from the final June reading of 93.5 and slightly below the Briefing.com consensus estimate of 90.4 ◦There was a downturn in both the Current Economic Conditions Index (from 110.8 to 109.0) and the Index of Consumer Expectations (from 82.4 to 77.8)
 
 
Monday's data will be limited to the 10:00 ET release of the July ISM Index (Briefing.com consensus 53.1) and Construction Spending for June (Briefing.com consensus 0.7%).
•Russell 2000 +7.4% YTD
•S&P 500 +6.3% YTD
•Dow Jones Industrial Average +5.8% YTD
•Nasdaq Composite +3.1% YTD
 
Week in Review: Tech Earnings Lead Nasdaq Higher
 
The past week told the tale of three markets as the tech-heavy Nasdaq climbed 1.2%, the Dow Jones Industrial Average lost 0.8%, and the S&P 500 set an intraday record high, but finished the week essentially where it started (-0.1%).
 
Quarterly earnings were largely responsible for the differential in returns with the Nasdaq benefiting from upside surprises reported by heavyweights like Apple (AAPL), Alphabet (GOOGL), Amazon.com (AMZN), Facebook (FB), and Celgene (CELG). Conversely, the Dow was pressured by weak results from ExxonMobil (XOM) and disappointing comparable sales results from McDonald's (MCD). The broader S&P 500 split the difference between the Dow and Nasdaq.
 
In addition to receiving a boatload of earnings, investors had to recalibrate their expectations for monetary stimulus from global central banks. The Federal Reserve made no changes to its policy stance and only hinted at the possibility of a rate hike in the near term. The central bank shared its lukewarm outlook on Wednesday, two days before the Friday release of the advance reading of second-quarter GDP, which missed estimates (1.2%; Briefing.com consensus 2.6%). Also on Friday, the Bank of Japan called for just slight adjustments to policy, undershooting market expectations for aggressive stimulus measures. The Japanese yen rallied in response, pressuring the dollar/yen pair to a two-week low near 102.00.
 
Rate hike expectations receded throughout the past week. Since last Friday, the implied probability of a rate hike in December, estimated by the fed funds futures market, declined from 47.8% to 33.0%. The fed funds futures market does not expect the Federal Reserve to depart from its current target range until after July 2017.