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Health & Fitness

David Joy: Investors look ahead to September

The summer doldrums have arrived on Wall Street against a backdrop of conflicting messages. Concerns about complacency have spurred new warnings of a possible pullback in stocks, just as the news on the global economy seems to be brightening somewhat.

In the U.S., with the exception of the mildly disappointing July jobs report, the latest round of economic data has been encouraging, including the first estimate of second quarter GDP, the ISM composite, foreign trade, consumer confidence, senior loan officers survey, mortgage delinquencies and jobless claims. The numbers are not robust, and some sectors are lagging, but there is evidence of gradual improvement.

The bull case for stocks hinges upon continued improvement in the economy as a necessary condition for future earnings growth. The economic data that we have seen recently offers just enough support to that argument to sustain investor optimism and limit most forecasts of any pullback to the mild variety, in the range of 3-5%. The fifty-day moving average of the S&P 500 is currently 1654. A pullback to that level would represent a decline from the peak on August 2 of 3.3%, and would be reminiscent, in terms of its severity, of the minor corrections experienced back in February and April, but less than the 5.8% downturn between late May and June. That last one, of course, came in response to changed expectations about the Fed’s intentions to commence tapering its quantitative easing program. When, exactly, such a shift in policy begins is subject to speculation, although most believe it will commence in September after the FOMC meets on the 17th and 18th.

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How much of that expectation is already priced into the market is difficult to say. Certainly, the commencement of tapering will come as no surprise. It has been the primary preoccupation among investors for the past three months. But whether its actual enactment will result in further adjustment in both stock and bond prices is not yet clear. Those expecting only a mild pullback in stocks would most likely maintain that even the event, not just its anticipation, has already been largely discounted. They would also most likely maintain that the economy is poised to accelerate, ensuring sufficient earnings growth to push stock prices higher. Both remain to be seen.

Improvements in China and Europe
To the surprise of some, the latest round of data from China has also been encouraging. The official PMI numbers, especially manufacturing, were better than expected, although the HSBC/Markit manufacturing survey continued to soften. The trade data improved unexpectedly, especially exports, as did industrial production and retail sales. And inflation remained subdued. In response, the Shanghai Composite index has climbed more than 6% in the past two weeks. In addition, global commodity prices have firmed, especially industrial metals. Copper is higher by 8%, aluminum is higher by 5%.

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Sentiment regarding Europe has improved recently as well. On Wednesday, we will learn if the Eurozone economy actually grew in this year’s second quarter for the first time since the third quarter of 2011. The consensus forecast is calling for growth of 0.2%. This comes after improvement in the composite PMI for July, which crossed into expansion territory for the first time since January 2012 and a rise in industrial production and factory orders in Germany. The United Kingdom has experienced a similar rise in its composite PMI, industrial production, and construction readings, all coming after quarterly GDP grew for the second straight time in the second quarter, the first such occurrence since the third quarter of 2011. The Euro Stoxx index is higher by 13% since late June, and the FTSE 100 is higher by 9%. During the same interim, the S&P 500 is higher by 7%.

Looking Ahead
With Congress, the White House, and much of Wall Street on hiatus, with the Fed not scheduled to meet for another five weeks, and earnings season wrapping up, trading volumes will lighten and moves can be exaggerated. Into this vacuum will be inserted a focus on economic data, as well as ongoing speculation and handwringing over the potential effects down the road of tapering, the debt ceiling, healthcare reform and so on. Not so for the other issues, but the week ahead will be important for U.S. economic data. Starting with retail sales, consumer prices, industrial production, housing starts and permits, New York and Philadelphia regional Fed surveys, and consumer sentiment are all on the calendar. Collectively, these reports will provide a good look into how the economy began the third quarter and the likelihood that growth will be firm enough to deliver the earnings that investors are expecting.

 

Disclosure
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.

The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.

The Shanghai Composite Index is a capitalization-weighted index of all stocks on China’s Shanghai Stock Exchange.

The EURO STOXX 50 is a market capitalization-weighted stock index of 50 large, blue-chip European companies operating within eurozone nations. The universe for selection is found within the 18 Dow Jones EURO STOXX Supersector indexes, from which members are ranked by size and placed on a selection list.

The FTSE 100 is a market-weighted index of the 100 leading companies traded in Great Britain on the London Stock Exchange.

Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution and involve investment risks including possible loss of principal and fluctuation in value.

Brokerage, investment and financial advisory services are made available through Ameriprise Financial Services, Inc. Member FINRA and SIPC.

© 2013 Ameriprise Financial, Inc. All rights reserved.

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