MarketView for August 31

Summary

The major equity indexes moved higher on Friday after Federal Reserve Chairman Ben Bernanke, articulating "grave concern" for a stagnant job market, said the central bank was prepared to take further steps to strengthen the economy if necessary.

Speaking in Jackson Hole, Wyoming, Bernanke did not do what many were hoping for and that was to indicate that the Fed had decided on quick action. However, his comments did bolster bets that the central bank was closer to providing more stimulus for an economy that is close to stalling. The Fed's next policy meeting is in mid-September, and many analysts are looking to it for a decision on a third round of quantitative easing.

While the equity markets were also somewhat stagnant for much of the week ahead of Bernanke's speech, expectations of additional stimulus from the Fed enabled all three indexes to post gains for August. Energy and materials shares were among the best performers.

Even with the advance, each of the major indexes posted a second straight weekly decline. The Dow was down 0.5 percent for the week, while the S&P 500 was down 0.3 percent and the Nasdaq was down 0.1 percent. For the month, the Dow rose 0.6 percent, the S&P 500 gained 2 percent and the Nasdaq climbed 4.3 percent, its best monthly performance since February.

Volume was light but above the low levels of earlier in week. The four other days this week were among the five lowest for volume all year. For the week, about 5.3 billion shares changed hands on the three major equity indexes. The year-to-date average is about 6.6 billion.

Wall Street is looking ahead to the European Central Bank meeting on Thursday that is expected to take pressure off highly indebted countries. Comments from ECB Executive Board member Benoit Coeure rekindled expectations for central bank action.

Among the day's best performing stocks, SAIC was up 3.4 percent at $12.21 after the computer contractor reported a drop in second-quarter profit and said it would split its business into two independent public companies.

Consumer sentiment rose more than expected to a three-month high, while the Institute for Supply Management-Chicago's index of Midwest business activity fell in August to 53.0 from 53.7 in July.

Fed Talks the Talk – Can It Walk the Walk

Federal Chairman Ben Bernanke on Friday left the door wide open to a further easing of monetary policy, stating that the labor market was a "grave concern," but he stopped short of providing a clear signal of imminent action. Nonetheless, his stark language gave a temporary lift to the financial markets, despite the still unanswered question of whether the Fed would actually launch a fresh round of bond purchases at its upcoming meeting in September.

Bernanke said the Fed had to weigh the costs as well as the benefits of more monetary stimulus, although he hinted the costs were likely worthwhile.

"As we assess the benefits and costs of alternative policy approaches ... we must not lose sight of the daunting economic challenges that confront our nation," Bernanke said at the Kansas City Fed's annual Jackson Hole symposium.

"Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability."

That was a somewhat weaker hint of policy easing than the minutes of the Fed's last policy meeting had delivered, but Bernanke's dour economic assessment left few doubts where his sympathy lay.

"The stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years," Bernanke said.

Bernanke's emphasis on the health of the job market throws an especially strong spotlight on a report due on September 7 on job growth in August. Hiring picked up in July but the jobless rate moved up to 8.3 percent.

Bernanke also downplayed the potential risks from the Fed's unconventional policies and argued the asset purchases had been quite effective at boosting economic growth.

"The costs of nontraditional policies, when considered carefully, appear manageable," he said.

"Unless the economy begins to grow more quickly than it has recently, the unemployment rate is likely to remain far above levels consistent with maximum sustainable employment," Bernanke said. The Fed is charged with pursuing both price stability and full employment.

Economic data has improved since the Fed's July 31-August 1 meeting, which came before the stronger-than-expected reading for July employment. Reports on retail sales, exports and housing have also been relatively solid.

A report on Friday showed U.S. consumer sentiment hit a three-month high in August, although pessimism on the future remained. The economy's generally better tone has led some market participants to dial back their expectations of a fresh round of Fed bond purchases in September.

As an alternative, the Fed may simply push further into the future the date it thinks it will finally start to move interest rates higher. The central bank has said since January that it expects to keep rates near zero at least through late 2014.

Consumer Sentiment Hits Three-Month High

Consumer sentiment reached a three-month high in August as households chipped away at outstanding debt, though Americans were pessimistic about the future, a survey showed on Friday. Separate reports on the manufacturing sector painted a mixed picture, with factory orders rising by more than expected in July but Midwest business activity slipping in August.

Manufacturing has lost momentum in recent months as economic difficulty in Europe and beyond has sapped overseas demand for U.S. products. However, consumers were in a slightly better mood this month. The Thomson Reuters/University of Michigan's final reading on overall consumer sentiment for August rose to 74.3, its highest since May. The survey's barometer of current economic conditions rose to 88.7 from 82.7, the highest since January of 2008.

Buying was bolstered by price discounts and low interest rates, the survey found. But the biggest source of optimism was tied to success in trimming debt. However, the survey's gauge of consumer expectations fell to 65.1 from 65.6, the lowest level since December of 2001.

A separate survey earlier this week from the Conference Board showed consumer confidence hit its lowest level since November, partly due to higher gasoline prices. Data on Friday also showed new orders for factory goods rose by the largest margin in a year in July.

Nonetheless, the Institute for Supply Management-Chicago said its index of Midwest business activity fell in August, though new orders increased. Other recent manufacturing indicators have indicated trouble in the sector. The Institute for Supply Management's monthly survey said U.S. manufacturing contracted for a second straight month in July.