After four weeks of gains, the market pulls back slightly

Investors have had a great run over the past few months, especially in the last four weeks, but that run has come to a bitter end.

MANHATTAN (CN) – Wall Street took a breather after four straight weeks of gains, as indexes fell slightly after a few reports showing declines in manufacturing and producer sentiment.

Earlier in the week, the markets continued their rally, but on Friday that changed, with the Dow Jones Industrial Average losing 292 points at the close, 55 points for the week. The S&P 500 and Nasdaq also fell on Friday to end the week on a losing note, with the former losing 52 points while the latter falling 342 points.

On Monday, the Federal Reserve Bank of New York’s manufacturing index for August fell more than 42 points into negative territory, the index’s second-biggest decline since its inception in July 2001 and the weakest it has been since May 2020, when it was. almost 50 negative points. Not only that, but business activity also fell sharply in the Empire State, with new orders falling to -29.6 from July’s 6.2.

Most analysts cringed when the report came out. Peter Boockvar, chief investment officer at Bleakley Advisory Services, wrote in an investor note that “we still, of course, have many more regional manufacturing surveys to look at to see if this is one-off or not, but this rate of change. It is unlikely to be isolated from this region.”

He added: “So you go on and on debating the semantics of whether we’re in a recession or not, but we should be paying much more attention to the trajectory of economic activity and that was an ugly report.”

Equally disappointing was the home sales report from the National Association of Home Builders, which showed existing home sales fell in July to the lowest level since the early days of the pandemic. Covid-19 in 2020.

The report also marks the eighth consecutive month that builder confidence has fallen and the first time since May 2020 that the index fell below its break-even point. The trade group attributed this to higher borrowing costs, persistent supply chain issues and rising interest rates.

“Tighter monetary policy by the Federal Reserve and persistently high construction costs have led to a housing recession,” NAHB Chief Economist Robert Dietz said in a statement. “However, as signs grow that the rate of inflation is nearing its peak, long-term interest rates have stabilized, which will provide some stability for market demand in the coming months.”

Other data this week were less unfortunate. Retail sales showed a slight improvement and beat analysts’ expectations, gaining 0.8% month-on-month in July, according to the US Census Bureau. Total sales from May 2022 to July 2022 were up 9.2% over the same period in 2021.

Some relied on the data as evidence that the US economy is not in recession and that GDP growth will pick up in the third quarter. “Consumers remain resilient in the face of sticky inflation,” said Cliff Hodge, chief investment officer at Cornerstone Wealth, though he also noted that “in an environment where good economic news is bad news for markets , the argument for a new bull market is even narrower.”

Others, like Boockvar, say retail sales gains have been driven by inflation rather than volume, as retail gains have largely kept pace with price increases. Inflation ending July 2022 has risen 8.5% since May 2021, about the same amount as retail sales over that period.

Arguably, however, the data shows some good nuggets, as falling gas prices in recent months have helped keep most retail sectors strong. Capital Economics’ Michael Pearce wrote that May’s retail sales revisions highlight that “consumption growth has held up better than previously thought and suggests that the risks to our forecasts that GDP growth will recover up to 2% in the third quarter are on the rise.”

Minutes from the Fed’s meeting last month also didn’t assuage some investor concerns. During that meeting, the central bank raised interest rates by 0.75%, the second of the year in its attempt to aggressively curb inflation. Experts virtually guarantee the Fed will raise rates again when it meets at the end of September in order to get the federal funds rate to a “neutral level,” although there is debate over whether that means another 75 basis points or just 50 basis points. base point increase.

According to the Fed’s minutes of the July 26-27 meeting, “some participants emphasized that the real federal funds rate would likely still remain below neutral levels in the near term after the rate hike policy of this meeting,” indicating that some Fed members remain bullish. Other members are clearly staying calm, as the minutes note that due to the “constantly changing nature of the economic environment,” the Fed could tighten rates “more than necessary to restore price stability.”

Experts are now focusing on the much-anticipated Fed meeting in Jackson Hole in September for more clues on where the central bank plans to go with interest rates in late 2022.