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Leigh Baldwin & Co.

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The Week In Review

8/26/16

The stock market ended a downbeat week on a flat note as commentary from the Jackson Hole Symposium boosted U.S. rate hike expectations and weighed on the major averages. The Dow Jones Industrial Average (-0.3%) settled behind the S&P 500 (-0.2%) and the Nasdaq Composite (+0.1%).

 

Equity indices enjoyed a modest bid at the start of the session as investors pored over a less-hawkish-than-feared interpretation of Fed Chair Yellen's seminal address. Chair Yellen indicated that the case for a rate hike had improved in recent months, but she also acknowledged that monetary policy is not on a preset course.

 

Investors initially shrugged off the commentary, evidenced by a transitory decline in the fed funds futures market. The implied probability of a rate hike at the September meeting briefly fell to 18.0%, slipping from the prior session's estimate of 21.0%. Additionally, equities and Treasuries rallied to session highs while the U.S. Dollar Index (95.49, +0.72, 0.76%) carved out a session low.

 

The broader market shifted gears near midday when Federal Reserve Vice Chairman Stanley Fischer resuscitated concerns regarding the speed and path of interest rate normalization. In a CNBC interview, Mr. Fischer indicated that more than one rate hike could take place before the end of the year. However, the Fed Vice Chair conditioned the potential hikes on a steady improvement in economic data. In response, the implied probability of a rate hike at the September meeting rose to 36.0% while the odds of an interest rate hike at the December meeting moved to 63.7%.

 

The S&P 500 (-0.2%) pared losses in the final hour, reclaiming technical support near the 2168/2171 price level. Despite the rebound, seven sectors ended in the red with the defensively-oriented telecom services (-1.1%) and utilities (-2.1%) sectors rounding out the leaderboard. On the flipside, heavily-weighted financials (+0.1%), technology (+0.1%), and health care (+0.4%) outperformed.

 

The countercyclical health care sector (+0.4%) ended in front of the pack, narrowing its week-to-date loss to 1.8%. Biotechnology displayed relative strength as the iShares Nasdaq Biotechnology ETF (IBB 285.14, +2.27) rebounded 0.8%. In the group, Amgen (AMGN 171.97, +1.74) outperformed while Mylan Labs (MYL 43.03, +0.18) recovered 0.4%. Mylan was under pressure this week as investors weighed criticisms regarding the price of its EpiPen device. Conversely, St. Jude Medical (STJ 78.01, +0.19) ended higher by 0.2% after responding to yesterday's bearish commentary from Muddy Waters Capital.

 

In the technology sector (+0.1%), the high-beta chipmakers outperformed, evidenced by the 0.5% gain in the PHLX Semiconductor Index. Micron (MU 16.51, +0.31) rallied 1.9%, sporting a week-to-date gain to 1.6%. This compares to a gain of 0.5% in the price-weighted index. Separately, large cap component Facebook (FB 124.96, +1.07) outperformed.

 

The consumer discretionary space (-0.3%) demonstrated relative weakness as retail names underperformed. The SPDR S&P Retail ETF (XRT 45.02, -0.34) ended lower by 0.8%, extending its week-to-date loss to 2.0%. Dow component Nike (NKE 59.00, -0.24) settled lower by 0.4% after being downgraded to "Neutral" from "Buy" at B. Riley & Company. Separately, Big Lots (BIG 50.57, -2.37) underperformed as investors evaluated mixed quarterly results.

 

Treasuries ended on a lower note as yields rose through the curve. The yield on the benchmark 10-yr note finished higher by four basis points (1.62%) while the yield on the 2-yr note finished at 0.84% (+5 bps).

 

Today's participation was above the recent average as more than 797 million shares changed hands on the NYSE floor.

 

Today's economic data included the second estimate of Q2 GDP, July International Trade in Goods, and the final reading of the University of Michigan Consumer Sentiment Survey for August:

 

Second quarter GDP was revised down to 1.1% from 1.2%, as expected, while the GDP Price Deflator was revised up to 2.3% (Briefing.com consensus 2.2%) from 2.2%.

There was no real change to second quarter GDP, which everyone had already realized was quite disappointing despite the strong pickup in consumer spending.

July International Trade in Goods showed a deficit of $59.32 billion, compared to the June deficit of $64.5 billion.

The final reading for the University of Michigan Consumer Sentiment Survey for August dipped to 89.8 (Briefing.com consensus 90.6) from the preliminary reading of 90.4.

The reading checked in just below the final reading of 90.0 for July.

For further details on these economic releases, be sure to visit Briefing.com's Economic Calendar page.

 

Monday's economic data will include July Personal Income (Briefing.com consensus 0.4%), Personal Spending (Briefing.com consensus 0.3%), and Core PCE Prices (Briefing.com consensus 0.1%), which will each be released at 8:30 ET.

 

Russell 2000 +9.0% YTD

S&P 500 +6.1% YTD

Dow Jones +5.6% YTD

Nasdaq Composite +4.2% YTD

Week in Review: All Eyes on Jackson Hole

 

The stock market spent the bulk of the week inside a narrow range, but Friday was a bit more active as participants responded to remarks from Federal Reserve Chair Janet Yellen, who spoke at the Kansas City Fed Economic Symposium in Jackson Hole, Wyoming.

 

During her speech, Ms. Yellen said that the case for a rate hike has strengthened in recent months, but she also noted that business investment remains soft and subdued foreign demand has restrained exports. Furthermore, Chair Yellen noted that future policymakers should explore the possibility of purchasing a broader range of assets. Overall, Ms. Yellen's speech could be deemed as hawkish or dovish depending on which elements one chose to focus on.

 

Ms. Yellen was followed by Fed Vice Chair Stanley Fischer, who appeared on CNBC and indicated that more than one rate hike could take place, but more data needs to be analyzed before that decision is made. Stocks retreated after these comments while rate hike expectations were pulled forward.

 

According to the fed funds futures market, the implied likelihood of a September rate hike increased to 36.0% from 21.0% on Thursday while the implied probability of a rate hike in December increased to 63.7% from yesterday's 51.7%.

 

The S&P 500 lost 0.7% for the week while the Nasdaq (-0.4%) outperformed slightly.

 

The first half of the trading week was very quiet even though participants received a few more quarterly reports from retailers. Best Buy (BBY), Guess? (GES), and PVH (PVH) surpassed estimates while Express (EXPR), Dollar General (DG), and Dollar Tree (DLTR) disappointed.

 

Although Friday's focus was squarely on the speech from Fed Chair Yellen, investors also received the second estimate of second-quarter GDP, which was revised down to 1.1% from 1.2%, as expected, while the GDP Price Deflator was revised up to 2.3% (Briefing.com consensus 2.2%) from 2.2%. There was no real change to second-quarter GDP, which everyone had already realized was quite disappointing despite the strong pickup in consumer spending.