Shares gained following better-than-expected economic data on new-home construction and solid earnings results from Home Depot.
The Dow rose 80 points, with 21 of its 30 components advancing; the S&P 500 Index increased by 9 points; and the Nasdaq gained 19. Advancers led decliners by nearly two to one on the NYSE and by six to five on the Nasdaq.
The prices of Treasuries weakened. Gold futures fell $2.60 to close at $1,296.70 an ounce, and the price of crude oil fell 89 cents to settle at $92.86 a barrel.
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Amy George interviews portfolio manager Margie Patel (right).
Three portfolio managers discuss technology and innovation in stocks and bonds. Amy George is on the road in Boston at the offices of Wells Capital Management, Inc. Joining Amy are Derrick Irwin, CFA, portfolio manager with the Emerging Markets Equity team; Margie Patel, managing director and senior portfolio manager for the Fundamental Equity group; and Jim Tringas, CFA, CPA, managing director and senior portfolio manager for the Special Global Equity team. These teams manage several Wells Fargo Advantage Funds across equity and fixed-income markets.
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Consumer prices increased 0.1% in July, or 2.0% over the past 12 months. The Federal Reserve (Fed) favors the Consumer Price Index (CPI) to measure personal consumption expenditures (PCE). The difference between the CPI and PCE is mainly in the weights assigned to goods and services in the calculation, with PCE better reflecting the actual purchases people make. The PCE accounts for substitution effects, meaning that when relative prices change (for example, if bananas go up in price faster than apples), people change what they purchase (in the example, people would tend to substitute apples for bananas). The average difference between the year-over-year change in the CPI and the PCE since the economic recovery began is 0.2 percentage points. So, a ballpark estimate of the PCE, based on a 2.0% year-over-year increase in the CPI, is that it increased 1.8%. That’s close to, but not at, the Fed’s long-term target of 2.0%.
Much media attention has been devoted to asking whether the Fed is (or perhaps accusing the Fed of being) behind the curve. A person—or, in this case, the group of people that make up the Federal Open Market Committee—is behind the curve when he or she is ignorant of recent developments. Maybe it’s my Midwestern sensibilities, but I start with the assumption that the Fed Chair and her colleagues are pretty darn smart. The assumption that naturally follows is that they are not behind the curve—not unless copious evidence suggests the contrary. So, let’s look at the evidence.
The Fed has been falling short of its target—on average—by 0.5 percentage points since the economic recovery began. The target itself is not an upper bound on where the Fed thinks inflation should be. Rather, it’s what the Fed wants to hit on average over long periods of time. How long is a long period of time? I have no idea, but it’s probably longer than one month here and one month there. It’s probably closer to five years, which is why the Fed’s projections in the Summary of Economic Projections gives estimates for 2014, 2015, 2016, and a longer run. If the Fed was achieving its goal of 2.0% inflation per year over five years, prices would be 1.3% higher than they are.
If you consider that real weekly earnings have been unchanged for two months in a row and were shrinking for the three months before that, there is no indication that the Fed is blithely ignoring building inflationary pressure. It’s just that there isn’t a buildup of pressure to begin with.
Geopolitical tensions eased over the weekend, and without any major news to drive direction, the markets moved higher on recent positive earnings and economic news.
The Dow gained 175 points, with 26 of its 30 components advancing; the S&P 500 Index added 16; and the Nasdaq rose 43 to close at a 14-year high. Advancers led decliners by 11 to 3 on the NYSE and by 3 to 1 on the Nasdaq. The prices of Treasuries weakened. Gold futures lost $6.90 to close at $1,299.30 an ounce, and the price of crude oil fell $1.57 to settle at $93.75 a barrel.
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“Whom the gods would destroy, they first make mad.” —The Masque of Pandora, Henry Wadsworth Longfellow
Obviously, Longfellow wasn’t referring to the stock market when he wrote those words, but he could have been. It seems to me that every major stock market peak over the past 50 years was preceded by a period of market madness, in which one sector or type of stock pulled ahead of the others and became the darling of speculators.
In 1968 (a bit before my time, but there are records), the favorite was small speculative stocks, especially small tech or gizmo stocks. If a company had a new product or new concept, it didn’t need earnings; it just needed a future. That all collapsed in 1969.
In 1972, it was the Nifty Fifty, that vaguely defined, limited number of large-capitalization favorites that an investor need never sell. These were the quality, the market leaders. Valuation did not matter. “Just buy ’em and hold ’em” was the wisdom of the day. That all collapsed in 1974.
Reports that Ukraine attacked a Russian military convoy today erased early gains in the markets and initially sent shares sharply lower. However, by the end of the day, the markets reversed those losses and closed mixed.
The Dow fell 50 points, with 22 of its 30 components declining; the S&P 500 Index lost less than a point; and the Nasdaq rose 11. Decliners led advancers by four to three on the Nasdaq and were even on the NYSE. The prices of Treasuries strengthened, driving the 10-year Treasury yield to its lowest point in over a year. Gold futures lost $9.50 to close at $1,306.20 an ounce, and the price of crude oil gained $1.77 to settle at $97.35 a barrel.
For the week, the Dow was up 0.6%, the S&P 500 Index increased 1.2%, and the Nasdaq climbed 2.1%.
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Stocks continued into positive territory after Russian President Vladimir Putin struck a conciliatory tone regarding tensions with Ukraine. Meanwhile, investors shrugged off softer-than-expected U.S. employment data and stalled economic growth in Europe.
The Dow rose 61 points, with 23 of its 30 components advancing; the S&P 500 Index gained 8 points; and the Nasdaq added 18. Advancers led decliners by two to one on the NYSE, and by four to three on the Nasdaq.
The prices of Treasuries strengthened after the Federal Reserve sold $16 billion of 30-year bonds at their lowest yield in 15 months.Gold futures rose $1.20 to close at $1,315.70 an ounce, and the price of crude oil fell $2.01 to settle at $95.58 a barrel.
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Stocks brushed off weak retail sales in July and a few disappointing earnings reports to post solid gains for the session.
The Dow gained 91 points, with 29 of its 30 components advancing (the exception was Wal-Mart, which is scheduled to report earnings tomorrow); the S&P 500 Index rose 12; and the Nasdaq closed higher by 44, helped by strong advances at large tech firms, such as Google, Apple, and Amazon. Advancers led decliners by nearly three to one on the NYSE and two to one on the Nasdaq. The prices of Treasuries strengthened. Gold futures rose $3.90 to close at $1,314.50 an ounce, and the price of crude oil gained 22 cents to settle at $97.59 a barrel.
In Earnings News:
Shares declined as investors watched events unfold in Ukraine and the Middle East. Also today, oil prices dropped after the International Energy Agency cut its global demand forecast and the U.S. Energy Information Administration reported a 30-year high in oil production.
The Dow fell 9 points, with 16 of its 30 components declining; the S&P 500 Index lost 3 points; and the Nasdaq declined 12. Decliners led advancers by three to two on the NYSE and by two to one on the Nasdaq. The prices of Treasuries weakened. Gold futures rose 10 cents to close at $1,310.60 an ounce, and the price of crude oil fell 71 cents to settle at $97.37 a barrel.
In Earnings News:
While most segments of the bond market have been in trading ranges this summer, the high-yield corporate market has seen a significant sell-off. Yields have increased as much as 100 basis points (bps; 100 bps equals 1.00%) since early June, with average prices down as much as 5 points. Since June 20, the high-yield market has recorded a total return of -1.5%, while the investment-grade corporate market shows a positive return of 0.9%.
That performance has raised fears that this is the onset of the widely predicted reversal of the five-year cyclical rally in high yield. Because yields had reached such low levels, the eventual cyclical rise in yields was often predicted to be brutal. This episode, however, appears to be a limited market correction rather than a prolonged cyclical bear market. It has been primarily a response to external factors rather than deteriorating credit fundamentals.
Geopolitical events that hurt the equity market—events in Ukraine and the Middle East—have similar effects on high yield. A flight to safety among global and domestic investors often sparks rallies in Treasuries and corrections in equities and high yield. Over the past six weeks, domestic equity and high-yield corporate mutual funds and exchange-traded funds have experienced net outflows as investors shifted away from what are regarded as riskier assets. This can likely produce a snowball effect, as selling to meet withdrawals typically lowers prices and net asset values, which, in turn, encourages more withdrawals.