Market Commentary: Summer is Over

The jubilation following recent monetary easing by the world’s central bankers sputtered this week as investors grappled with relatively harsh news on the economic front.
The S&P 500 index, after hitting a five-year high Sept. 14, has suffered a mild sinking spell, falling 1.3 percent this week to close at 1,441. Government bonds rallied on slowdown concerns, with the yield on the 10-year Treasury falling 0.12 on the week to close at 1.63 percent. Gold, which has recently been reacting positively to the massive money-printing operations taking place throughout the world, closed nearly flat for the week at $1,772 an ounce, down 0.06 percent.

By Regina Shafer, Assistant Vice President, Fixed Income Investments

The U.S. manufacturing sector, an important segment of our economy, appears to be contracting. This was evidenced this week by the Chicago Fed National Activity Index, which posted a negative reading of -.87 for August, and the Dallas Fed Manufacturing Outlook of -0.9 for September. The Richmond and Kansas City Fed indexes, however, did report slightly positive readings of 4 and 2, respectively.

The ISM Milwaukee Purchasers Manufacturing Index and the ISM Chicago Business Survey both reported deteriorating business conditions, with readings of 47.2 and 49.7, respectively.
Durable-goods orders for August were an abysmal -13.2 percent, the worst reading since 2009, and down 1.6 percent excluding the volatile aircraft segment.
Personal income in August rose just 0.1 percent, slightly less than expected. Real per capita income and wealth remain lower than they were five years ago, showing the effects of the severe recession, and the weakness of the recovery.

Second-quarter economic growth, as measured by real GDP, was revised downward to a subpar 1.3 percent, decelerating from the first-quarter reading of 2.0 percent.
Housing remains a bright spot for our economy, but at only 2 percent of GDP, it does not represent a major contributor to potential economic growth. However, rising home prices could have a positive effect on consumer psychology. August pending home sales were up 9.6 percent on a year-over-year basis, inventory is down to relatively normal levels, and prices have been rising for the past few months.

As summer has closed and we move into autumn, investors will focus on multiple issues. First, earnings season for the third quarter begins next week, and expectations have been dropping for several weeks. The consensus forecast for third-quarter earnings growth for the S&P 500 is only 2 percent. Second, Europe will be a constant worry, given the ongoing discussions between Spain, Italy and the European Union regarding their potential request for bailout funding. Third, the U.S. presidential and congressional elections and the upcoming fiscal cliff budgetary issues will be a recurring concern.

This content is provided courtesy of USAA.

This material is for informational purposes and is not investment advice.

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