U.S. stocks got hammered on Friday, erasing close to half of the recent rally to end last week at the May 6 “flash crash” intraday low, as the market could no longer ignore what the last three days of economic data has suggested: manufacturing activity and inventory rebuilding are running out of steam. And without job growth you can’t chalk it up to transitory weakness. 

It seems the market is increasingly beginning to price in that strong corporate profit growth alone does not an expansion make – particularly since the preponderant element driving these profits is very lean payrolls. 

Financials led the decline, hammered by 4.37%, with consumer discretionary (down 3.54%) and industrials (down 3.42%) rounding out the worst-performing groups.  Telecom (down 1.19%), consumer staples (off by 1.31%) and utilities (slipped 1.64%) were the best performing groups. 

For the week, the broad market (S&P 500) lost just 1.21%, thanks to a rally earlier in the week.  Small cap stocks got clocked though, down 3.02% last week to close near its lowest level since February.  Watch the smalls, if they continue to struggle it will likely portend further declines for the overall market.  Whether it’s the Russell 2000 or the S&P 600, the smalls are down close to twice as much as the S&P 500 since mid June.

The yield on the 10-year fell to 2.92% and the two-year fell below that 0.60% mark we’ve been watching.  Yow!

Market Activity for July 16, 2010

CPI

Consumer prices, according to the conventional gauge, fell 0.1% in June following a downwardly revised 0.2% decline in May.  As we talked about earlier in the week, this back-to-back decline will spook Bernanke’s deflation paranoia – even though the core rate rose 0.2% last month (boosted by a 0.8% climb in apparel prices). 

I think there is more inflation out there than the gauges are signaling (albeit still fairly sight with regard to most goods), but there doesn’t appear to be any immediate worry that prices will take a meaningful move higher.  As we’ve discussed before, watch credit.  Until it begins to expand, inflation cannot take off because money sits fallow – there is not too much money chasing too few goods, at this time.

On the Fed’s next move, you can just feel the second round of QE coming.  The Fed will end up buying massive amounts of government bonds, and these low reading on the inflation gauges will offer them the cover to do so.  It will do no good, only helping the government meet its financing obligations for a time.  The low mortgage rates that will remain in place will do little good for the housing market as a strong labor market is much more the necessary condition for home sales than is low interest rates.

UofM Sentiment

The latest reading on consumer sentiment fell to the lowest level since August 2009, much worse than expected and below even the most negative of forecasts.  The overall reading slid to 66.5 for July from 76.0 in June – and this is the preliminary take for the month, the revision will come on July 30; the trend has been downward revisions. The consensus forecast was for a reading of 74.0.

The current economic conditions survey plunged to 75.5 from 85.6 – lowest reading since November.  The economic outlook survey sank to 60.6 from 69.8 – lowest level since the ugly days of March 2009. 

A record low share of respondents expected their incomes to rise over the next year, and that will affect spending.  More than seven of 10 believe the economy remains in recession.  It is a complete “wipe out” of the past year’s worth of gains in consumer confidence (as one economist termed it) and puts to shame all of those assessments that consumer sentiment was on the mend. 

Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900