MarketView for September 1

 

 

Summary  

 

Wall Street's four-day rally ground to a halt on Thursday, with major indexes falling 1 percent on caution ahead of a key labor market report expected to underscore fears the economy is headed for another recession.

 

Financials were the biggest losers, selling off sharply in the afternoon, led by Goldman Sachs. Goldman's shares fell 3.5 percent to $112.16 after agreements with the Federal Reserve and New York state's banking regulator over wrongful foreclosures raised concerns that Goldman is still not yet off the hook.

 

JPMorgan Chase and Bank of America saw the largest decline among the stocks making up the  Dow Jones industrial average, both falling more than 3 percent.

 

A day ahead of the government's release of monthly payrolls data, a decline in the employment component of the Institute for Supply Management's factory activity index heightened worries that August jobs growth will be weaker than feared. ISM's factory activity index came in only just above the level that indicates growth.

 

After dropping more than 17 percent from early July to early August, the S&P 500 had risen by 9 percent heading into Thursday's session, leaving investors reluctant to place big bets a day ahead of the August labor report, which is expected to show an increase of 75,000 jobs. The S&P has gained more than 5 percent during the four-day rally that ended on Wednesday. The increase was heavily tied to rising optimisim for a new stimulus plan from the Federal Reserve at its meeting in late September.

 

Shares of Netflix fell as much as 10 percent in extended trading after Starz Entertainment said it would stop distributing its content on the online movie renter's streaming platform. Netflix stock later pared losses to trade down 5.5 percent at $211.06.

 

Ciena rose 20 percent to $14.71 after posting a profit for the first time in three years. Cisco gained 1 percent to $15.82 and led the Dow.

 

Retailers reported August same-store sales that were slightly below expectations as Hurricane Irene drove business away from some stores. Target fell 1.2 percent to $51.06 while Costco closed up 1.2 percent at $79.48.

 

Construction spending fell 1.3 percent to an annual rate of $789.5 billion, the largest drop since January, according to the Department. However, June's construction spending was revised to a 1.6 percent increase rather than the previously reported 0.2 percent decline.

 

Weekly jobless claims declined by 12,000 in the latest week, while nonfarm productivity was weaker than previously thought in the second quarter.

 

Volume was light, with about 7.49 billion shares changing hands on the major equity exchanges, a number that was well below last year's daily average of 8.47 billion shares.

 

Unemployment Claims Fall

 

According to a report released by the Labor Department Thursday morning, claims for unemployment benefits declined last week creating some hope that the job market may be improving slightly. Weekly applications fell 12,000 to a seasonally adjusted 409,000 claims last week. It was the first decline in three weeks. The four-week average, a less volatile measure, rose last week to 410,250. Still, that was mostly because of the strike. It has come down from 440,250 in May.

 

A strike by Verizon workers drove applications higher during the previous two weeks. The strike has ended and is no longer affecting applications. However, applications typically need to drop below 375,000 to signal sustainable job growth. They haven't been at that level since February.

 

The downward trend suggests employers aren't stepping up layoffs amid renewed concerns about the economy's health. A sharp reduction in growth has fueled fears that the economy could be at risk of another recession.

 

The government reports Friday on job growth in August. While the report is always important, economists will pay particular attention to the data to see if businesses pulled back on hiring in response to the plunge in stock prices and the gloomy economic outlook.

 

The economy expanded at an annual pace of just 0.7 percent in the first six months of this year, the weakest six months of growth since the recession officially ended in June 2009. Economists expect growth will only improve to about a 2 percent pace in the second half of this year.

 

Recent data suggests the July-September quarter is off to better start. Employers added 117,000 jobs in July, about double the pace of the previous two months. Consumer spending rose that month by the most in five months, partly because Americans bought more cars and spent more to cool their homes. And businesses ordered more goods from factories, particularly autos and airplanes, the Commerce Department said Wednesday

 

Still, hiring has slowed since earlier this year, and the unemployment rate remains high, at 9.1 percent. The economy added an average of 72,000 jobs from May through July, down from an average of 215,000 per month in the previous three months.

 

More jobs are needed to fuel faster economic growth. Higher employment leads to more income. That boosts consumer spending, which accounts for about 70 percent of economic growth.

 

Fewer people are continuing to receive unemployment benefits. About 3.74 million people received benefits in the week ending Aug. 20, a week behind the applications data. That's a drop of 18,000 from the previous week. However, that does not include about 3.5 million additional laid-off workers who are receiving extended benefits under an emergency program put in place during the recession. All told, 7.3 million people received benefits in the week ended Aug. 13, the most recent data available.

 

Economic Data Surprises

 

The August manufacturing data released Thursday morning exceeded the expectations of many analysts, while fewer Americans filed new claims for jobless aid last week, defying a slump in confidence that threatened to push the economy back into recession. According to a report by the Institute for Supply Management (ISM), its index of national factory activity fell to 50.6 from 50.9 in July. The modest slowdown confounded economists' expectations for a fall to 48.5. Any reading below 50 indicates a contraction in the nation's factory sector.

 

Nonetheless, key details of the ISM survey were soft and initial claims remained perched above the 400,000 level usually associated with a stable labor market. That indicated the pace of economic growth would remain slow, but further reduced the odds of a second recession.

 

Data ranging from consumer spending to industrial production have showed some strength in the economy after output barely grew in the first half of the year.

 

Retail Sales Mixed

 

Retailers reported mixed August sales results after Hurricane Irene drove away business at some chains and boosted it at others. The final tally on Thursday, based on reports from 23 retailers, showed that sales at stores open at least a year rose 4.4 percent in August, just shy of the 4.6 percent rise analysts expected. The results raise the possibility that certain back-to-school sales are lost for good.

 

Chains were evenly split between those that beat expectations and those that missed. Discount stores such as BJ's Wholesale Club and Target saw an increase in sales ahead of Hurricane Irene, as shoppers along the Atlantic coast stocked up on necessities like batteries, flashlights and bottled water. BJ's said same-store sales, including those of gasoline, rose 11.5 percent, blowing past the analysts' forecast of 7.8 percent, according to Thomson Reuters.

 

Target beat analysts' expectations of a 3.5 percent gain with a 4.1 percent increase. The company said the pre-storm rush lifted same-store sales in August by about 0.5 percentage points and would reduce them in September by a little less than that. It sees September same-store sales up at a low to mid-single-digit rate.

 

While "the pace of the economic recovery is uneven and uncertain," Target had "solid results" in the back-to-school and back-to-college categories, said CEO Gregg Steinhafel. The discounter benefited from moves such as putting dorm-sized refrigerators next to clothing in some stores.

 

Costco, the country’s largest warehouse club and the largest retailer to report monthly same-store sales, posted a higher-than-expected 11 percent rise late on Wednesday.

 

August is the peak of back-to-school shopping, the second-most important period for U.S. retailers after the year-end holiday season. Sales in recent months have held up despite weak economic indicators, offering hope for August and the rest of the year, until the hurricane disrupted shopping along the East Coast during a key weekend.

 

Macy's, which closed more than 100 stores for all or part of last Saturday due to Irene, said the storm shaved about 1.5 percentage points from its August same-store sales. Still, it posted a 5 percent gain, topping the analysts' estimate of 4.5 percent.

 

"We expect the hurricane's effect on sales will be substantially offset as we move through September and the third quarter,"  Macy's Chief Executive Officer Terry Lundgren was quoted as saying.

 

J.C. Penney and TJX Cos both missed August same-store sales estimates and blamed the storm. TJX, the operator of the off-price TJ Maxx chain, reported a 1 percent same-store sales gain, below the 2 percent forecast. Following Irene, it said business rebounded solidly early in the September reporting period, leaving it comfortable with its quarterly sales and earnings forecasts.

 

Kohl's, whose sales also came in lower than expected, blamed weak traffic and its stores and said it would focus more on pricing this fall to "reverse this trend."

 

The monthly sales tally speaks to the strength of consumer spending, which accounts for roughly 70 percent of U.S. economic activity. Still, major retailers that saw brisk storm-related business, such as grocers, Home Depot and Wal-Mart, do not report monthly results. In addition, the storm's full sales impact will not be known until September's monthly report, since many retailers' August reporting periods ended on Saturday.