Retesting the Lows
The S&P 500 fell 1.35% last week, and is down sharply again this morning, as investors remained unconvinced that actions by the Federal Reserve have helped the economy. Even though second quarter U.S. GDP growth was revised upward to 3.9%, major global stock indices lost ground as Asian economic reports indicated further weakness.
Amid a backdrop of continued mixed economic news, a pattern we have highlighted in this space on several occasions, investors seem fixated on the negative data points. In particular, U.S. durable goods orders fell 2% in August, magnified by a sharp drop in the volatile civilian aircraft component. The closely-watched capital goods orders (stripped of military spending and aircraft) fell 0.2% in August, its first decline in three months. This important gauge of business spending plans had risen 1.5% in June and 2.1% in July.
Continuing the downbeat theme, the University of Michigan consumer sentiment index fell to 87.2 in September, the lowest reading since October 2014. By way of comparison, the August reading was 91.9. Finally, Markit’s preliminary U.S. purchasing managers’ index (“PMI”) was unchanged in September from the August reading of 53.0, still reflecting expansion but at the slowest pace since 2013. The culprits? The usual suspects – the strong U.S. dollar, weaker demand in many export markets, and reduced capital spending in the energy sector.
The week would seemingly not be complete without another negative data point from China. The preliminary manufacturing PMI for the Peoples’ Republic slipped from 47.3 in August to 47.0 in September, the lowest reading in 6 ½ years. Fixed-asset investment from January to August rose at the slowest pace in 15 years. In a positive note, retail spending strengthened, which is one of the long-range planning goals of the current regime.
There was a political component to the week as well. Health care stocks were hit hardest, with members of the S&P 500 Health Care Index falling 5.75%, after presidential candidate Hilary Clinton took aim at a Swiss drug company that raised the price of their only drug 5,500%. Gilead Pharmaceuticals, representative of the group and one of the market’s recent best performers, fell 7.65% for the week. Other leading lights in the biotech sector were quick to point out the extreme and aberrational nature of the Swiss company highlighted by Mrs. Clinton. Investors, leery of a major driver of innovation becoming a political football, decided to shoot first and ask questions later.