NAS-Crash. A quiet August week on Wall Street got a little livelier when the Nasdaq exchange crashed on Thursday. Trading on Nasdaq, the second-biggest U.S. stock exchange, halted on Thursday for several hours due to a so-far undiagnosed technical problem. Thursday’s failure at Nasdaq is the latest of a flurry of high-profile glitches to hit U.S. stock market trading. We saw a “flash crash” in 2010 that caused a huge but short-term drop in the markets. Errors related to the Facebook initial public offering caused some analysts to wonder about the whole process of IPOs. Knight Capital’s trading blowup last year undermined market confidence still further. Earlier this week, a technical problem at Goldman Sachs resulted in a flood of erroneous orders being sent to U.S. equity options markets.
Should we care? The truth is that the markets do have these technical glitches from time to time. When it happens, traders scream because they make money on each transaction, and when they can’t make trades, it costs them money. But for the rest of us, it’s not that big a deal unless the problems keep recurring. That would have a tendency to undermine confidence in the exchange and perhaps cause traders to avoid the Nasdaq altogether. The Nasdaq has more than 3,500 stocks on it, so if traders decide that the Nasdaq is simply an unsafe marketplace, that could have a huge impact on the economy. But I honestly don’t see that happening.
Europe again. Aside from the Nasdaq crash, it was so quiet that we finally started hearing news from Europe again. On Monday, the markets dropped in part based on news of Italian political unrest. In fact, the Dow fell Monday, Tuesday, and Wednesday, capping six straight days of losses—the longest losing streak of the year.
Otherwise, good news. Europe and stock market shutdowns aside, the economic news this week wasn’t bad. On Tuesday, for example, we got good earnings reports from some major retailers, and on Wednesday The National Association of Realtors said existing home sales jumped 6.5 percent in July to an annual rate of 5.39 million units. That’s the highest level in three years. U.S. manufacturing activity hit a five-month high in August, and China’s manufacturing sector rebounded, providing evidence that the world economy is on the mend. Other U.S. data showed the number of Americans filing new claims for unemployment benefits rose last week but held close to a six-year low, giving a positive signal for hiring during the month. Second-quarter earnings season ended with a bang as some major retailers— TJ Maxx, Marshall’s, Urban Outfitter, and Best Buy—reported better-than-expected results this week. Home Depot also raised its outlook for the rest of the year.
Fed up. So if the news was good, why were the markets sluggish? Once again, the Federal Reserve’s $85 billion bond-buying program is trumping other economic news. The Fed released the minutes from its July 31 meeting this week, but they provided little if any insight into when the Fed would start tapering its program. That uncertainty is causing the markets to adopt a wait-and-see attitude that is contributing to the August doldrums.
Calm before autumn storm? The week ahead is the last before Labor Day. Will these doldrums continue for another week, and if they do, is it a calm before an autumn financial storm? That’s an interesting question, especially since we will be getting a number of important reports in the week ahead. On Tuesday, we’ll get the August Consumer Confidence report. We’ll get more housing data on Tuesday and Wednesday, and a revised second quarter GDP number on Thursday. Volume has been relatively low in recent weeks, but sometimes that can create an environment for volatility. And then in September, Congress goes back in session. Between arguments over defunding Obamacare and passing a continuing resolution to keep the government funded, we are likely in for a very interesting fall.