David Joy — Chief Market Strategist, RiverSource Investments
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The unceasing rise in the price of oil slammed stocks once again last week. The August crude oil futures climbed another $4.85 a barrel to $140.21 sending stocks sharply lower across the board.
The Dow Jones Industrial Average shed 4.2 percent, leaving it lower on the year by 14.5 percent. Barring a strong rally this Monday, this is shaping up as the worst June for the Dow since the Great Depression.
The S&P 500 Index fell three percent, bringing its loss for the year at 12.9 percent, and the Nasdaq Composite Index slid 3.8 percent, leaving it down 12.7 percent for the year.
Few groups were spared the latest carnage. Energy and healthcare did manage modest gains, as did some of the materials producers.
Elsewhere it was ugly. Financials bore the brunt of the selling, falling more than seven percent in the process. Even REITs, which had held up quite well, moved sharply lower. For the year, financials are down 29 percent, and are down a whopping 43 percent over the last 12 months.
The S&P 500 did manage to stay above the previous closing low for the year at 1273.37, reached on March 10. The index closed at 1278.38 on Thursday.
The inflationary implications of higher energy prices were reflected in the price of gold, which rose $27.60 an ounce, to $931.30.
The dollar also weakened, losing roughly one percent. The near-term path of the dollar depends on what the European Central Bank does. The ECB meets this week and many expect a quarter-point rate hike, especially after some recent tough talk on inflation. The eurozone's inflation rate through May was four percent, the highest it's been in years.
The bond market benefited from the weakness in stocks. The yield on the two-year note ended the week at 2.63 percent. Two weeks ago it was trading above three percent. The 10-year yield fell 20 basis points to close below four percent for the first time in three weeks, and down from a recent peak of 4.27 percent.
Expectations of a rate hike by the Federal Reserve also eased. What had been a 20 percent chance of a half-point increase by September fell to an 80 percent chance of a quarter-point hike.
Investors now expect rates to be a half-point higher by year-end, down from even odds of a full, one percent increase.
On Wednesday, the Fed chose to leave rates unchanged but emphasized its awareness of building inflationary pressure.
The May Personal Consumption Expenditure (PCE) deflator showed no change in the core rate from the previous month at 2.1 percent, helping to keep a lid on inflation concerns for now. The headline number actually fell slightly from 3.2 to 3.1 percent.
The flight to safety seen in the Treasury market was not the case among lower-quality bonds. The yield on the Merrill Lynch High-Yield Master II Index rose 50 basis points to 10.94 percent, its highest level since the week of the Bear Stearns sale. Its spread over the 10-year note widened by 71 basis points over the week to 760, and has widened by a total of 104 basis points in just two weeks.
The news on housing prices evidenced further weakness, only adding to the pressure on consumers. Another decline in the S&P/ Case-Shiller Home Price index in April leaves that measure of housing values down 17.8 percent from its July 2006 peak.
The news in housing wasn't all bad, however. Existing home sales in May were a little better than expected, rising two percent. New home sales fell 2.5 percent, which also modestly beat expectations.
The June employment report dominates the economic calendar this week. Expectations are for a drop in the unemployment rate from 5.5 to 5.4 percent, despite additional job losses of approximately 60,000.
Many are expecting the June report to be a better indication of the real employment picture given that the May report showed a spike of 0.5 percent, which many observers believed did not accurately account for the increase of students entering the workforce.
The best this market can hope for in the short-run is a pullback in oil prices. The Fed is counting on economic weakness to keep inflation in check, and although it may already be too late to prevent higher oil prices from pushing core inflation higher, any relief would be welcome by both consumers and investors alike.
The views expressed in this report reflect the views of RiverSource Investments, LLC as of the date given. These views may change as market or other conditions change. Actual investments or investment decisions made by the firm and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed in this report. 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. Asset classes described in this report may not be suitable for all investors. Past performance does not guarantee future results and no forecast should be considered a guarantee either.
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The Dow Jones Industrial Average (DJIA) is an index containing stocks of 30 Large-Cap corporations in the United States. The index is owned and maintained by Dow Jones & Company.
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 NASDAQ composite index measures all NASDAQ domestic and international based common type stocks listed on the Nasdaq Stock Market.
The Merrill Lynch High-Yield Bond Master II Index is an unmanaged index that tracks the performance of below investment grade U.S. dollar-denominated corporate bonds publicly issued in the U.S. domestic market. This unmanaged index does not reflect fees and expenses and is not available for direct investment.
The S&P/Case-Shiller® Home Price Indices are designed to measure the growth in value of residential real estate in various regions across the United States.
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