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September 8, 2014 - Why Another Uptick in Spite of Bad News?

| September 08, 2014
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Markets chalked up another win last week, pushing the S&P 500 to another record close. After several days of cautious trading, Friday's August jobs report finally gave investors the push they needed to extend gains for a fifth week. For the week, the S&P 500 grew 0.22%, the Dow gained 0.23%, and the Nasdaq added 0.06%.[1] 

Investors reacted with surprising relief to a disappointing August employment report that showed jobs growth braked to an eight month low. The data shows that payrolls increased by just 142,000, after expanding by over 200,000 in July. Data from June and July was also revised downward, tempering optimism about the labor market recovery. However, even though growth slowed, underlying trends show that slack in the labor market is still slowly being taken up.[2] Another positive bit of news is that what jobs were created came from areas like business services, health care, and construction - areas where job seekers can potentially find high-paying, career-oriented jobs.[3]

Why the positive reaction to disappointing news? This is a case of bad news being treated like good news; investors have been chewing their nails in recent weeks over the possibility that the Federal Reserve could end quantitative easing and hike interest rates sooner than expected. A poor labor market showing takes away some of that risk, giving relieved investors some stimulus to rally.

In Europe, the European Central Bank (ECB) cut interest rates to the bone and announced a new plan to boost lending, neatly avoiding the discussion of whether to engage in a full-scale Fed-style quantitative easing program. If "QE-light" fails, the ECB may be forced to take on the debt of struggling states like Portugal and Spain to boost economic growth. Right now, the bank is counting on constituent governments to do their part by cutting taxes and engaging in economic reform.[4] Will this be enough to boost Europe's stagnant economy in the face of waning demand and economic sanctions against Russia? We won't really know until next year.

The crisis in Ukraine continued last week, with Russians achieving control over the eastern half of the country, and Western leaders debating whether or not to take a more active military role in constraining Russian ambitions. While U.S. leaders are willing to show their displeasure through further sanctions, the European bloc, sensitive to their dependence on Russian energy, are more reluctant to act.[5]

The week ahead is slow on economic data until Friday, when analysts will get a look at retails sales, consumer sentiment, and business inventories, all important indicators of economic health. With investor sentiment so high, it's quite possible that a bump in the road may cause stocks to temporarily turn downward in coming weeks as investors hit pause and take stock of their surroundings.

ECONOMIC CALENDAR:

Tuesday: JOLTS
Wednesday: EIA Petroleum Status Report
Thursday: Jobless Claims, Treasury Budget
Friday: Retail Sales, Import and Export Prices, Consumer Sentiment, Business Inventories


Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

HEADLINES:

Factory orders post record gains. Orders for goods from U.S. factories jumped 10.5% in July, driven by strong demand for aircraft and automobiles. Excluding the volatile transportation category, orders for manufactured goods are still on a modest upward trend.[6]

Fed Beige Book shows pickup in economic growth. The Federal Reserve's anecdotal snapshot showed that the U.S. economy expanded at a moderate pace over the last six weeks, though its tone was more tempered than other government reports. Overall, the Fed believes economic growth is expanding at a moderate pace.[7]

Motor vehicle sales grew 6% in August. A strong Labor Day showing helped sales of light vehicles to grow significantly year-over-year, indicating that American consumers are feeling confident enough about their prospects to make big-ticket purchases. Overall, sales are expected to increase in coming months due to pent-up demand and improving employment conditions.[8]

Chain stores reported solid August sales growth, indicating that the back-to-school shopping season was solid. Though chain stores make up only 10% of retail sales, they are an important indicator of overall consumer spending trends.[9]


These are the views of Platinum Advisor Marketing Strategies, LLC, and not necessarily those of the named representative, Broker dealer or Investment Advisor, and should not be construed as investment advice. Neither the named representative nor the named Broker dealer or Investment Advisor gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.


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Diversification does not guarantee profit nor is it guaranteed to protect assets.

The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896.

The Nasdaq Composite is an index of the common stocks and similar securities listed on the NASDAQ stock market and is considered a broad indicator of the performance of stocks of technology companies and growth companies.

The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indexes from Europe, Australia and Southeast Asia.

The Dow Jones Corporate Bond Index is a 96-bond index designed to represent the market performance, on a total-return basis, of investment-grade bonds issued by leading U.S. companies. Bonds are equally weighted by maturity cell, industry sector, and the overall index.

The S&P/Case-Shiller Home Price Indices are the leading measures of U.S. residential real estate prices, tracking changes in the value of residential real estate. The index is made up of measures of real estate prices in 20 cities and weighted to produce the index.

The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

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  1. http://goo.gl/2h4rPE
  2. http://www.reuters.com/article/2014/09/05/us-usa-economy-idUSKBN0H008E20140905
  3. http://www.cnbc.com/id/101975098
  4. http://www.reuters.com/article/2014/09/05/us-ecb-qe-idUSKBN0H01C920140905
  5. http://www.cnbc.com/id/101977417
  6. http://www.reuters.com/article/2014/09/03/us-usa-economy-idUSKBN0GY1Y820140903
  7. http://www.usatoday.com/story/money/business/2014/09/03/fed-beige-book-august/15016553/
  8. http://www.zacks.com/stock/news/146196/us-auto-sales-up-6-y-y-in-august-general-motors-leads
  9. http://wsj-us.econoday.com/byshoweventfull.asp?fid=460532&cust=wsj-us&year=2014&lid=0&prev=/byweek.asp#top
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