Stocks sold off sharply on Thursday, reversing Wednesday’s gains and putting all major indexes into negative territory for the month of September. Technology shares fell the most, declining 2.28% as a sector, as all sectors of the S&P declined. Commodities were generally weaker, while the U.S. dollar index strengthened. Investors were worried about the strength of the global economy, as well as new geopolitical concerns relating to Russia and Ukraine, and comments from Fed officials that an interest rate hike may come sooner than previously estimated.
Friday’s 8:30 AM second quarter GDP report will be critical to market action on Friday and might set the stage for next week as well. The last revision of GDP showed the U.S. economy growing at 4.2% and consensus estimates now show that economists expect an upward revision to 4.6% for tomorrow’s final reading. Should data show that the U.S. economy is growing at an increasingly faster pace, the Federal Reserve may well consider raising interest rates sooner than previously thought – and markets will likely view this in a bearish manner. However, in our view, the timing of the first rate hike is fairly inconsequential – the importance of when the first rate hike occurs is far outweighed by the size and frequency of future rate hikes. In other words, whether the Fed raises rates by ¼% in December, March or June doesn’t matter nearly as much as whether the Fed raises by ¼% or ½% and when subsequent rate hikes occur. As we have previously detailed, our research clearly shows that in virtually all previous deliberate interest rate hike campaigns (multiple rate hikes over several months) markets have performed reasonably well when the hikes were modest and tempered. In addition to GDP data, investors will be watching the Five-year and Ten-year Treasury yields for cues from the bond market. Separately, investors should recognize that these worries are likely to be temporary and that corporate earnings will prove much more impactful on market direction than the timing of the first rate hike. Currently, S&P Capital IQ reports that consensus analyst estimates show corporate earnings growing by 6.8% year-over-year in Q3. Given that generally over 65% of companies beat earnings by more than 3%, it is reasonable to deduce that Q3 earnings will rise approximately 10%, about as much as they did in Q2. As a result valuation will prove to be more attractive than many estimate, and as investors look forward to the rest of the year and into early 2015, there is plenty of encouraging news to help drive markets higher.
Next Week’s Market Moving Events:
- Monday: German CPI, followed by US Personal Income, Pending Home Sales, Dallas Fed Manufacturing Survey and Farm Prices. After the close: Japanese Industrial Production and Chinese Manufacturing PMI.
- Tuesday: Eurozone retail sales and consumer data, followed by the US Redbook report, Case Shiller Home Prices report, Consumer Confidence, Chicago PMI, Investor Confidence and Chinese Manufacturing data.
- Wednesday: US Motor Vehicle sales, Eurozone PMI Manufacturing data, Mortgage Applications, ASP Unemployment, Job Creation, Construction Spending.
- Thursday: Challenger Job Cut Report, Jobless Claims, Factory Orders
- Friday: Eurozone PMI data, US Employment Data, PMI Services data, ISM Non-Manufacturing Index, Global Composite PMI and Services PMI data.
Make sure to tune into Money Matters with Gary Goldberg this Saturday at 7:00 AM and Sunday at 11:00 AM on WOR 710 AM Radio to hear our latest economic analysis, interviews with some of the most respected business leaders in the world, as well as our ongoing market commentary. Visit our website www.ggfs.com for details.