Yesterday provided a nice breather from the selling we’ve seen over the last week or so. Although not great in total numbers, the rally yesterday impressed me for two simple reasons – 1) the market rallied at all and 2) the rally was broad based.
- Stocks closed higher on Monday with broad gains across most sectors that helped the S&P 500 rebound from its largest weekly drop since 2012.
Make no mistake the bears are not in hibernation, at least not yet. There are still plenty of sellers out there growling about the Fed, inflation, deflation, earnings, China, Russia, Ukraine, and the not-so-blue sky.
U.S. Stocks Fall on Service Industry Data.
Bloomberg News delivered the headline above and when I first read it, I assumed it meant the data was not so good, so the market dropped. But I like Bloomberg News, so I reread, and the fact is the headline simply states reality – US stocks fell this morning after the data came out, true enough.
The other fact is that China’s Service Industry data was flat and one part of that data (Private Index) dropped to its lowest level in 12 years. Yet that is not the complete story on the “Service Industry Data.”
- Service industries in the U.S. expanded in July at the fastest pace since December 2005.
Granted, China is heading 12 years in the wrong direction and the US is headed nine years in the right direction, but if you had to choose one economy over the other, which would you pick? As well, when looking at the US Service Industry data as a metric for the US economy, consider the following.
- Service industries account for 68 percent of U.S. GDP and four out of five U.S. jobs.
That is a whole lot of jobs, for sure, but it is not all of the jobs. Another 16% come from the manufacturing sector, and that is doing better as well. When you put the two together, well …
- The pickup among service providers, combined with the strongest rate of growth in more than three years at American factories, shows the world’s largest economy was strengthening at the start of the third quarter.
And when you put it all together, all the recent positive data about the US economy, it is hard to escape the following conclusion.
- Faster payroll growth is helping fuel consumer demand, raising the odds a self-reinforcing cycle of increased hiring and spending is underway.
So, why then is the market down today. Again, I have two simple reasons. The first is that the selling hangover is not gone. As I said, there are still plenty of sellers around. The second is the earnings of Target and Motorola. Both failed to deliver and that is a reason for the bears to push their agenda forward. Yet, don’t confuse the earnings from these two companies with the reality of earnings so far this season.
- Of the S&P 500 members that have posted financial results so far this season, 76 percent have beaten earnings estimates and 65 percent have exceeded sales projections.
Given the above, what could happen to the market? Well, putting aside all the nonsense news about the Fed and interest rates, as that is now baked into the cake, and considering it is summer after all, one should logically conclude the market has a brighter outlook for the coming autumn, which begins next month, a couple of weeks after Labor Day, which marks the traditional end to the US driving season.
The good news there is gasoline prices have been steadily dropping for a month now. Where I live here in California, we have not seen gas prices below $4 since, well, since a long time ago. The other day, I bought gas for $3.79. On top of that, the oil glut is finally affecting the price of oil. When was the last time we saw the price of light-sweet crude remain below $100 for two weeks? I have an answer – it was mid-December through mid-February.
My point is we can add to the economic mix the probability that oil prices will continue to fall through the fall, which makes that whole consumer spending thing a brighter light for the US economy and earnings for the next season.
Trade in the day; invest in your life …
