MarketView for July 31

 

 

Summary

 

The S&P 500 finished a volatile session ending the trading day nearly flat as the Federal Reserve gave no hint that a reduction in the pace of its bond-buying program is imminent. In a statement following its two-day policy meeting, the Fed said the economy continues to recover but still needs support. The central bank said it would keep buying $85 billion per month in Treasury and mortgage securities in an effort to strengthen the economy.

 

The benchmark index pulled back just before the close after rising within two points of 1,700, a key resistance level that the S&P 500 has struggled to break. However, All three major U.S. stock indexes posted sharp gains for July, however, with the S&P 500's 5 percent increase its best monthly percentage gain since January. The Fed's stimulus has been credited by many as central to the S&P 500's gain of 18.2 percent so far this year.

 

Most growth-oriented sector indexes finished the session higher, with the S&P consumer discretionary index up 0.5 percent. At the same time, dividend-paying stocks such as utilities slipped. The S&P utility index fell 0.7 percent.

 

Fed Chairman Ben Bernanke jolted markets in late May by saying the central bank planned to ease back on its stimulus efforts once the economy improves. Many economists expect the Fed to reduce its bond-buying pace in September.

 

Late in the session, shares of J.C. Penney fell10.2 percent to $14.60 after commercial lender CIT Group indicated it had ceased supporting deliveries from smaller manufacturers to the department store chain, according to a New York Post report. The stock was the S&P 500's largest percentage loser.

 

The Dow set an all-time intraday high of 15,634.32 early in the session, while the Nasdaq reached a session high of 3,649.35, its highest since late 2000. For the month of July, the Dow chalked up a again of 4 percent, the S&P 500 was up 5 percent and the Nasdaq 6.6 percent. It was also the 10th straight session where the S&P 500 traded within 10 points of the 1,700 level. A rise above that level could signal that stocks have more room to rise.

 

After the bell, shares of Whole Foods fell 1.6 percent to $54.68 following the release of its quarterly earnings.

 

In Wednesday's session, the shares of credit card companies ranked among the worst performers. Shares of Visa fell 7.5 percent to $177.01 and had the largest negative impact on the S&P 500. Shares of American Express were down 1.9 percent to end the day at $73.77.

 

In another milestone set earlier in the session, Facebook stock traded above its initial public offering price of $38 for the first time since its market debut in May 2012. The stock rose as high as $38.31. Facebook closed at $36.80, down 2.2 percent.

 

Comcast gave the S&P 500 its largest upward push after the Company posted a higher quarterly profit on Wednesday, as it added more Internet customers than expected on the cable side and booked an increase of more than 20 percent in operating cash flow at its NBC Universal unit. Comcast's Class A stock rose 5.6 percent to close at $45.08.

 

Shares of Herbalife chalked up a gain of 9.1 percent to $65.50 after it was leaked that billionaire George Soros has taken a large long position in the nutritional supplement company. Herbalife's stock moved as high as $66.25 on the report, its highest price since May 2012.

 

Approximately 7 billion shares changed hands on the three major equity exchanges, a number that was above the average daily closing volume of about 6.4 billion shares this year.

 

Fed Mum on Plans

 

The Federal Reserve on Wednesday said the economy continues to recover but is still in need of support, offering no indication that it is planning to reduce its bond-buying stimulus at its next meeting in September. Wrapping up a two-day gathering, the central bank said it would keep buying $85 billion in mortgage and Treasury securities per month in an effort to strengthen an economy that it said was still challenged by federal budget-tightening.

 

The Fed made three notable adjustments to its post-meeting statement, which economists said gave it a dovish tilt. First, it slightly downgraded its view of the recovery, calling the pace of growth "modest" rather than "moderate," as it had consistently for most of the past year.

 

It also noted that mortgage rates had moved higher, implicitly flagging this as a potential headwind to the housing recovery.

 

And, importantly, it nodded to the potential dangers of inflation running too low - an addition that apparently secured the vote of St. Louis Federal Reserve Bank President James Bullard, who dissented in June over worries about ebbing price pressures.

 

"The committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term," the Fed said.

 

The Fed's statement gave stock prices a brief lift, but they closed lower on the day, while prices for U.S. government bonds edged higher and the dollar fell.

 

Esther George of the Kansas City Fed voted against the bond-buying decision due to concerns about potential harm to financial stability from the central bank's prolonged easy monetary policy, as she has at every meeting this year.

 

The Fed cut interest rates to almost zero in late 2008 and has since more than tripled the size of its balance sheet to around $3.6 trillion via three massive rounds of bond buying aimed at holding down longer-term borrowing costs.

 

Even as it tiptoes toward a curtailing of its bond purchases, the Fed has gone out of its way to stress that any pull-back would not mean it was anywhere near jacking up interest rates.

 

In another slightly dovish adjustment to its statement, the Fed "reaffirmed" on Wednesday its view that ultra-easy monetary policy would be needed for a considerable period after bond buying ends.

 

However, the Fed made no change to the key thresholds of its forward guidance on rate lift-off, repeating it will hold rates near zero for as long as the unemployment rate remains above 6.5 percent, provided the outlook for inflation between one and two years ahead is not projected to rise above 2.5 percent.

 

Despite the Fed's best efforts to use its forward guidance to hold down longer-term borrowing costs, markets have responded to talk of a likely reduction in the central bank's asset purchases by selling bonds. The yield on the benchmark 10-year U.S. Treasury note stands about a full percentage point above where it was in early May. Mortgage rates have risen a similar amount.

 

"Household spending and business fixed investment advanced, and the housing sector has been strengthening, but mortgage rates have risen somewhat and fiscal policy is restraining economic growth," the Fed said.

 

GDP Surprises

 

Economic growth unexpectedly accelerated in the second quarter, possibly laying a cushion for the rest of the year that could bring the Federal Reserve a step closer to cutting back its monetary stimulus. Gross domestic product grew at a 1.7 percent annual rate, the Commerce Department said on Wednesday, stepping up from the first quarter's downwardly revised 1.1 percent expansion pace.

 

The economic picture was further brightened by the ADP National Employment Report, which showed private employers added 200,000 jobs in July, maintaining June's pace. It offered hope the government's comprehensive employment report on Friday could show a recent run of fairly strong job gains extended to July.

 

Rebounds in business spending and export growth, and a sharp moderation in the pace of decline in government outlays helped send the growth number higher in the April-June period, offsetting cooler consumer spending and a steady rate of inventory accumulation.

 

Still, the report marked a third straight quarter of GDP growth below 2 percent, a pace that normally would be too soft to bring down unemployment. But growth was poised to gain even more momentum in the second half of the year as the fiscal burden brought on by belt-tightening in Washington eases.

 

Revisions to earlier GDP data released along with the report on Wednesday cast the economy in a better light than previously, and contributed to the report's solid tenor.

 

The government implemented a number of changes in how it calculates GDP. For example, research and development spending will now be treated as investment, and defined benefit pension plans will be measured on an accrual basis, rather than as cash.

 

The revisions showed the economy grew 2.8 percent last year, 0.6 percentage point faster than previously estimated. They also yielded a higher rate of savings, a good omen for future consumer spending.

 

Still, higher taxes, as Washington tries to shrink the government's budget deficit, constrained consumer spending in the second quarter. Consumer spending, which accounts for more than two-thirds of economic activity, slowed to a 1.8 percent growth pace after rising at a 2.3 percent rate in the first quarter.

 

The slow pace of consumption kept a lid on inflation pressures, with a price index in the report holding steady in the second quarter. Excluding food and energy, prices rose at a subdued 0.8 percent pace. Both measures were the weakest since the first quarter of 2009.

 

Tepid domestic demand also led businesses to keep close watch on their inventories. Inventory accumulation added 0.41 percentage point to growth, less than half its contribution in the prior quarter. However, higher savings and a firming labor market should help to spur consumer spending and encourage businesses to continue a steady pace of restocking.

 

Private employers added 200,000 jobs in July after hiring 198,000 in June, the ADP report showed. The figure was in line with the pace of job growth seen since the start of the year. Exports rebounded in the second quarter, showing the largest percentage gain since the third quarter of 2011, even as demand weakened in Europe and China. Yet, the increase was insufficient to offset strong import growth, leaving a trade deficit that weighed on GDP.

 

Business spending reversed the prior quarter's decline, and while government spending contracted for a third straight quarter, the pace of the decline slowed sharply as state and local government spending rebounded.