Last week the U.S. equity market represented by the S&P 500 gave back a fair amount of its gains from the previous month. While the index had a positive month in May, increasing 1.29%, last week the index slid as it returned -0.65% to give June a negative start. Overall, stocks have had a slight decline in the two weeks since claiming an all-time closing high of 2130.82 on May 21st.
Overall, the economic data were positive last week. To recap, Monday kicked the week off in fine fashion, with April construction spending, April personal income, and May ISM manufacturing numbers increasing and beating expectations. Greek debt concerns reared their ugly head again midweek, and the equity markets reacted accordingly. Thursday received positive economic news in the U.S. in initial jobless claims, which came in at 276k, lower than the previous week’s 282k and slightly better than the consensus estimate of 278k.
Thursday’s good economic news was negated by the IMF cutting their U.S. GDP growth forecast. The S&P 500 index fell -0.86%, the worst daily performance of the week, with economically sensitive materials, energy, and industrials leading the decline. Good news was bad news again on Friday, as positive May non-farm payroll numbers reported much higher than expected. This data put pressure on stocks at the open, with concern of a shortening time horizon on a possible rate hike.
We expect this continuing push-pull action in the U.S. equity markets going forward. Investors will struggle to decide if positive economic data is enough to offset the beginning of a Fed round of short term interest rate hikes. Historically, markets can withstand the higher rates as long as the economy can withstand the effects of Fed tightening. The trouble comes when investors fear that excessive Fed action will lead to recession. We are not there yet.