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Weekly Market Update – August 28, 2015

It was a wild ride in the stock market this week with the S&P 500 and Dow starting Monday with their worst one-day performance since 2011 with a negative 3.94% and 3.57% performance, respectively.  The market routing continued Tuesday, before a springboard recovery took hold Wednesday and Thursday to propel the market to a positive weekly performance with the S&P500 and Dow closing up 0.91% and 1.11%, respectively.  Friday’s market action stabilized after a weeklong display of significant volatility, with the S&P500 and Dow finishing relatively flat on the day.

Global growth concerns stemming from China’s recent economic slowdown and the precipitous drop in its regional stock markets has investors on the edge of their seats.  Up until Wednesday, China’s policy efforts to support its markets, which included an interest rate cut, the pledge of state owned enterprise to buy equities, and the ban of short selling, had proved ineffective.  On Wednesday, China’s government through its Central Bank, upped the ante by promising the financial entities $21.8 billion in short term loans to improve liquidity and stabilize funding costs among its banks. 

Though markets around the world reacted positively to this measurement, this quick recovery came with a great economic cost.  The Chinese government has been explicit about the necessity of transitioning its economy from saving and investment to a more sustainable consumption driven economy that is less dependent on government intervention.  Wednesday’s intervention illustrates that the Chinese economy is struggling with this transition.  Furthermore, the intervention invites the occurrence of moral hazard or the encouragement of risky behavior with the expectation that the government will intervene and bail out the reckless parties.  Given the Chinese Government’s actions, they must have felt the short term benefits of the liquidity injection outweighed the long term risks of future potential bailouts.

Despite the recent stock market volatility, U.S. fundamental macro-economic data was impressively positive this week.  On Wednesday, Durable Goods Orders, an important proxy for manufacturing activity, blew past expectations of -0.6% with a reading of 2.0% for the month of July.  On Thursday, Initial Jobless claims were lower than expected and the second estimate of Q2 GDP was revised upwards from 2.3% to 3.7% which was even higher than the market expectations of 3.1%.  While the GDP revision is a lagging economic indicator, it suggests that the U.S. economy was carrying much stronger momentum into Q3 than was initially expected.  These positive economic developments assisted oil’s price recovery this week as the price for one barrel of WTI oil jumped from $38.24 on Monday to $45.38 at the close on Friday for a weekly gain of 18.7%.

Important economic data points and events next week include the Chicago Purchasing Manager’s Index on Monday, the Fed’s Beige Book for the month of September on Wednesday, and Non-Farm Payrolls and Unemployment Rate data for the month of August.  The net new jobs created in August will be critical in evaluating the future of U.S. interest rate movements.

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Ulland Investment Advisors

4550 IDS Center · Eighty South Eighth Street · Minneapolis MN 55402 · Telephone: 612-312-1400 · Facsimile: 612-204-3464