Financial Professionals

Insights

Summer Slowdown

08/03/2014

The first week of August begins with capital market participants focused on whether the long-awaited correction has begun. The last week of July presented some economic data points that suggest the Fed might be behind the curve with regard to its continued historically easy monetary policy.

  • Q2 GDP reported above consensus estimates at 4%
  • U.S. ISM Manufacturing “new orders to inventories” ratio came in at a robust 14.9
  • Q2 Employment Cost Index rose 0.7%, the biggest gain since Q3 2008
  • Initial Jobless Claims 4-week moving average is at its lowest since April 2006

Last week’s economic data fostered a sell-off for the S&P 500® Index (SPX) from the all-time high of 1991.39 on July 24 toward last Friday’s 1916.37 low, slightly ahead of the 100-day moving average of 1910.97. Last week I offered 1950 as a key support level for the SPX. Now that 1950 is breached, keep a technical eye on that new resistance level, as bullish forces must reclaim it quickly in order to keep the bullish momentum intact.

SPX Year to Date, as of August 4, 2014

Source: Bloomberg

Unfortunately, the week ahead does not present much on the earnings or economic calendar. In fact there is not much on this month’s calendar until the Kansas City Fed’s Jackson Hole economic symposium on August 21-22. Therefore, investors should rely on some internal indicators for possible guidance about whether that much debated correction is upon us. 

  1. U.S. Dollar Rally

Keep a watchful eye on the value of the U.S. dollar, which has risen sharply in the past few weeks to a high for 2014. Further appreciation of the U.S. dollar will be a near-term headwind for the capital markets. The SPX rally at the end of 2013 was largely driven by a corresponding U.S. dollar sell-off that benefited multi-nationals. Keep in mind, our domestic fiscal policy still relies on “monetizing our debt” and “robust exports,” both of which need a weaker U.S. dollar.

U.S. Dollar Index, August 5, 2013 to August 4, 2014

Source: Bloomberg

  2. U.S. 2-Year to 10-Year Yield Curve Flattening

In late July, the yield curve for 2- and 10-year U.S. Treasuries continued to flatten. On July 29, it traded to 191 basis points. It began the year at 261 basis points. It closed at 202 basis points on Friday. Further weakness below 200 basis points will weigh on shares of financial institutions and negatively impact the overall SPX direction.

Past performance is not a guarantee of future results.

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.