Week of August 8, 2016
Global markets ended the week higher with the S&P 500 and the NASDAQ Composite stealing the headlines as they closed at all-time highs following stronger job creation in July.
The Dow Jones Industrial Average and the S&P 500 were up 0.6% and 0.43%, respectively, while the NASDAQ Composite outperformed both to notch a 1.14% gain last week. International markets were down slightly with Japan's Nikkei 225 Average, China's Shanghai Composite and the broad MSCI Europe Index all ending the week in the red. Our commentary below primarily revolves around economic news with a brief review of the aforementioned US unemployment numbers, GDP and auto sales. We conclude the week in review with an interesting story of an artist and his "sculptures".
The US created 255,000 new jobs in July, blowing away economists' expectations of 179,000. The bulk of the creation came from the private sector with 217,000 jobs whereas the public sector created just 38,000. In addition, more people joined the workforce as measured by a labor force participation rate that inched up to 62.8% from June's 62.7%. The combination of new jobs with more people looking for jobs counteracted each other in July, keeping the official unemployment rate at 4.9%. The strong job growth was also met with a slight uptick of eight cents in average hourly earnings for the month, marking a 2.6% year-over-year increase as of the end of July. Increases in average earnings can be a catalyst for inflation, one of the Federal Reserve's key metrics, and investors increased their expectations for a rate increase by year end. According to CME market data, investors now peg the probability of a rate increase by December of 2016 at 43%, up from June's 32% probability.
Gross domestic product, the most comprehensive measure of goods and services produced by the United States, missed expectations to grow at a paltry 1.2% for the second quarter, averaging 1% for the first half of the year. Economists were expecting a more robust 2.6%. What's more, this brings the average annual gross domestic product (GDP) growth rate to 2.1% since the end of the recession, marking the slowest expansion in at least 67 years according to the data. However, economists were encouraged by the growth in consumer spending. Consumption makes up nearly 66% of GDP and grew at a rate of 4.2% over the second quarter. Dragging GDP down was a further reduction in inventories and the third straight quarterly drop in business investment. It appears businesses are reticent to invest given their views on the current macroeconomic environment.
According to July's data, auto sales for the top three carmakers fell after experiencing six consecutive yearly increases, eclipsing gains by their three closest competitors. General Motors, Ford and Toyota experienced declines of 1.9%, 3% and 1.4%, respectively, igniting fears that the light vehicle market may have peaked. Honda was the lone bright spot, reporting a year-over-year growth in sales of 4.4%. Economists have paid particularly close attention to the auto industry as it has been a driver for economic growth over the years with low financing terms and cheap gas prices enticing more buyers to showroom floors. What's more, the demand for automobiles has driven job and wage growth for workers across the country and especially Detroit. Should this truly mark the peak of auto sales, the slowdown could splash some cold water on future job expansion and the already tepid GDP growth.
Fun Story of the Week
Sculptors use a variety of media to create their masterpieces including stone, clay and marble. Berndnaut Smilde, however, uses nothing more than a spray bottle and a smoke machine. Of course, given his materials, the sculptures don't last long. The Dutch artist creates clouds indoors, photographing them at just the right moment as part of his Nimbus series. Smilde has created clouds in churches, castles and even dungeons but they all require the same cold, humid environment. He starts by spraying the water in a large area while the smoke machine shoots a puff into the water vapor. The results are truly amazing and the sparse backgrounds only intensify the images.
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This newsletter was written and prepared by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.
The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.
S&P 500 INDEX
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
NIKKEI 225 AVERAGE INDEX
The Nikkei 225 Average Index is a Japanese index that tracks the top 225 companies listed on the Tokyo Stock Exchange. It includes the most liquid Japanese stocks listed in the first section of the Tokyo Stock Exchange. It is price-weighted and yen-denominated.
SHANGHAI COMPOSITE INDEX
The Shanghai Composite Index is a market index of all stocks (A shares and B shares) that are traded on the Shanghai Stock Exchange. It tracks the largest publicly traded companies in China.
MSCI EUROPE INDEX
The MSCI Europe Index captures large- and mid-cap companies across 15 developed markets countries in Europe.
CNBC, August 2016. http://www.cnbc.com/2016/08/05/us-markets.html
Wall Street Journal, August 2016. http://www.wsj.com/articles/ford-and-gm-sales-slipped-in-july-1470145541
Wall Street Journal, July 2016. http://blogs.wsj.com/briefly/2016/07/29/second-quarter-u-s-gdp-at-a-glance/
Wall Street Journal, July 2016. http://blogs.wsj.com/economics/2016/07/29/seven-years-later-recovery-remains-the-weakest-of-the-post-world-war-ii-era/
Wall Street Journal, July 2016. http://www.wsj.com/articles/u-s-economy-grew-at-a-disappointing-1-2-in-2nd-quarter-1469795649
Wall Street Journal, August 2016. http://blogs.wsj.com/moneybeat/2016/08/05/july-jobs-report-everything-you-need-to-know-2/
CNBC, August 2016. http://www.cnbc.com/2016/08/05/nonfarm-payrolls-july-2016.html
Wired, June 2015. http://www.wired.com/2015/06/berdnaut-smilde-nimbus/