Market Perspective for August 22, 2014

The S&P 500 Index pushed on to a new all-time high, closing up 1.70 percent for the week. The Dow Industrial gained 2.03 percent and is close to hitting a new all-time high as well. The Nasdaq rallied 1.64 percent, while the Russell 2000 1.63 percent.  With the exception of the Russell 2000, this is now the third straight positive week for the major indexes.

On Wednesday the Federal Reserve released the minutes of its prior meeting. The minutes showed some members of the Federal Reserve Board want to increase interest rates sooner rather than later. These members see a strong economy and firming inflation as reasons to be more aggressive with monetary policy. Investors mainly ignored the minutes, including bond investors. Interest rates did increase slightly for the week, but the move looks like a regular short-term reversal following a previous drop in rates.

Janet Yellen’s speech at Jackson Hole today also failed to stir the markets. She said the Fed intends to exit QE in October and that rates could rise based on economic fundamentals. She leaned towards the dovish side with her focus on the slack labor market, which is keeping¬†a lid on inflation, saying that the Committee judged that underutilization of labor resources still remains significant.”

One important data point favoring the hawks at the Federal Reserve is strong manufacturing data. The flash PMI for August hit 58, well above the July number of 55.8 and the highest reading since April 2010. Any number over 50 signals economic expansion in the manufacturing sector and PMI has been climbing all year. Manufacturing is a leading indicator for the economy because much of manufacturing takes place at the earlier stages of production, such as making the components for other goods. Changes in the manufacturing sector show up months later in the broader economy.

Strong earnings were again a positive for the markets. Home Depot (HD) shares moved sharply higher on Wednesday following a beat of earnings estimates and higher guidance. Lowe’s (LOW) followed up with a strong earnings report on Thursday, but it lowered guidance. Shares of Lowe’s were up for the week though, as it followed Home Depot higher on Wednesday. Overall, the retail sector was strong on the week, as SPDR Retail (XRT) saw its best week in nearly two months.

Shares of Hewlett-Packard (HPQ) gained 5 percent on Thursday following a solid earnings report that delivered earnings in line with estimates and higher than expected revenues. The technology sector also got a boost from Ebay (EBAY), which gained just shy of 5 percent when the firm announced it’s considering a spin-off of PayPal.

In other news, Argentina decided to end its battle with holdout bondholders in New York by forcing them to take new bonds issued in Buenos Aries. China’s flash PMI for August slumped to just above 50, renewing concerns about the slowing economy.

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