Daily Dispatches
Trader John Santiago works on the floor of the New York Stock Exchange.
Associated Press/Photo by Richard Drew
Trader John Santiago works on the floor of the New York Stock Exchange.

Dollars and Sense: News just good enough to fuel the rally

Money

July ends strong. We ended the month this past week on a high note for all three major stock indexes. For the month of July, The Dow Jones Industrial Average rose 4.4 percent. The S&P 500 rose 5.5 percent, and the tech-heavy NASDAQ grew a robust 7 percent. The reasons for the rise: Earnings generally exceeded expectations this quarter, the Institute for Supply Management’s manufacturing index jumped significantly, and new claims for unemployment dropped to a five-year low. We also learned today that the July unemployment rate fell to 7.4 percent. 

On the other hand. Despite the drop in the unemployment rate, companies created a disappointingly low number of new jobs. And the Standard & Poors/Case-Shiller 20-city home price index showed a lower-than-expected year-over-year gain of 12.2 percent in May. Also, the Conference Board’s Consumer Confidence Index came in at 80.3 for July, down from June. Annualized Gross Domestic Product (GDP) growth for the second quarter was a worse-than-expected 1.7 percent. All of this caused Sam Stovall of Standard and Poor’s to say the news is not great, but just good enough to fuel the rally, and—more importantly—keep the Fed in the financial markets.

Fed fiddling. But the Fed can’t stay in forever, and when it quits its bond-buying program, won’t that be a big problem? Probably, but it depends on how it’s handled. The Federal Open Markets Committee met this week, and it didn’t make any major changes to its policy statements. Lots of analysts thought the Fed might taper its bond-buying program in September. It now increasingly looks like that won’t happen. As to the question of whether it will be a big problem unwinding the bond program: I think almost everyone agrees it will be a problem. As to how big a problem will depend on how much, how soon, and how fast. All these questions are still up in the air. And, of course, Ben Bernanke is likely to step down at the end of the year. So lots of people think he just wants to keep the crash from happening on his watch.

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The Week Ahead. It’s likely to be a pretty quiet week in the markets. Earnings season is all but over, and we’ve had no big surprises. Though I should mention that sometimes the earnings surprises come at the end of the reporting cycle. So far, though, we’ve seen no indication that might happen, such as companies saying their financial statements are just not ready. It will also be a slow week for economic reports. The Institute for Supply Management’s Services Index will report today, and we’ll get trade balance numbers on Tuesday. But neither of these reports normally move the markets. The markets moved down on Friday after the disappointing jobs number. But it wasn’t a big move. Also, Congress is in recess for most of August. That’s always a good sign.

Warren Cole Smith
Warren Cole Smith

Warren, who lives in Charlotte, N.C., is vice president of WORLD News Group and the host of the radio program Listening In. Follow Warren on Twitter @WarrenColeSmith.

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