Ameriprise Financial : Stocks Keep Climbing – What Could Slow this Market Down?

Stocks barely budged last week, but the S&P 500 nevertheless managed a small gain to establish another new closing high at 2184. It was the sixth weekly advance in the past seven, leaving the index 6.9 percent higher on the year. It mattered little that July retail sales were flat, or that consumer sentiment in August was as well or even that producer prices declined. The softer data apparently only reinforced the view that the Fed will remain on the sidelines for longer and that trumps everything else.

The release of minutes from the July Fed meeting this Wednesday will offer some insight into its current state of mind, but the recent choppy data may once again render the minutes moot. Following release of the retail sales data, expectations for the next rate hike slipped somewhat, but remain focused primarily on the middle of next year. The Fed has attempted to keep investors guessing in regard to its intentions at the upcoming September meeting, but the market is currently ascribing just a 16 percent chance of a rate hike coming that soon.

Economic Data and Oil Will be Top of Mind for Investors this Week

Attention this week will shift to the UK consumer with the release of July retail sales on Thursday, the first good look at economic activity following the Brexit vote. The consensus forecast calls for a 0.1 percent gain following a 0.9 percent decline in June. Anything worse may suggest a faster and sharper reaction to the vote than perceived. As it is, economic activity in the third quarter is currently forecast to drop by 0.1 percent according to Bloomberg, with a 48 percent chance of a recession in the next twelve months. Inflation readings are scheduled for Tuesday and will be closely watched given the sharp decline of the pound since the vote.

After declining for two straight months, crude oil has managed to mount something of a rebound in the past two weeks. On June 8, Brent crude hit its recovery high of $51.84 a barrel and subsequently retreated 22 percent to $40.30 by Aug. 2. Since then, however, it has climbed back to $45.31. Contributing to the recent climb was once again speculation that OPEC and other producers may discuss a production freeze in September. And while a freeze is not the same as a production cut, it would contribute to belief that the market can eventually balance.

It may be recalled that similar talk helped turn around prices earlier in the year. As a reminder that the oil market has changed, however, and that U.S. production is now far more influential, the U.S. rig count rose for the seventh straight week. And while stocks overall were essentially flat last week, the energy sector rose 1.7 percent and has climbed 14 percent on the year.

Emerging Markets Reap the Benefits of Central Bank Stimulus

One of the beneficiaries of central bank largess has been the world's developing markets. An improving liquidity picture and softer dollar have contributed to a 14.6 percent rise in the MSCI emerging markets index this year (in dollar terms). The Latin America region, in particular, has surged 37 percent as currencies have rebounded strongly versus the dollar. In Brazil, the Bovespa index is up 34 percent on the year in local currency terms, but in dollars it is higher by a stunning 68 percent. Returns in Asia have been more modest, up 10 percent on the year, but higher nonetheless.

And in one possibly far reaching development that has flown somewhat under the radar screen, India's parliament recently passed a major tax reform overhaul that will streamline the currently fractious tax regime into a unified system. The Financial Times cites economic estimates that the reform could add up to 2 percentage points to GDP growth per year.

In the U.S. this week we will get a closer look at how the economy started the third quarter. After the disappointing retail sales number, this week's report on industrial production will take on added significance. Also on the calendar are consumer prices, housing starts and permits and leading indicators. Expect trading volumes to slow as investors take advantage of the last few weeks of summer.
Important Disclosures:
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 MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.
The Bovespa Index is a gross total return index weighted by traded volume & is comprised of the most liquid stocks traded on the Sao Paulo Stock Exchange.
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