Week in Review
Stock prices retreated after 3 consecutive weeks of gains, including the first one-day drop of more than 1% for the S&P 500 since May. Growth sectors took the brunt of the damage, with the NASDAQ Composite falling 2.85%. Crude oil bucked the weakness in other risk assets, riding OPEC production cut extensions to its highest close since last November.
Fitch downgraded long-term US government debt to a notch below AAA last week, citing recurring political battles over the debt ceiling and rising fiscal imbalances that will make it more difficult to service debt. Treasury yields spiked on the news, with both 10 and 30-year yields rising to their highest levels since last November.
Meanwhile, economic data continues to be healthy, despite survey data showing that lending standards are tightening and the manufacturing sector is in decline. Nonfarm productivity in the second quarter spiked to 3.7%, among its best readings over the last decade, while unit labor costs fell to their lowest level in 2 years. Friday’s payrolls report showed continued moderation in jobs growth, but the unemployment rate still managed to fall back to 3.5%. It’s hard to have a recession when employment levels are near the lowest levels of the past half-century.
Market leadership has shifted in favor of cyclicals over the last month. Energy climbed out of the cellar to lead all sectors with a 6.1% gain, while both Financials and Industrials outpaced the S&P 500's 0.5% gain. Information Technology, which had been a leader all year, dropped 1.4%.
Growth sectors are still in the pole position year-to-date, with Communication Services, Information Technology, and Consumer Discretionary each up more than 30% since December. Investing in any other area would have yielded a return well below that of the S&P 500's 16.6% YTD gain. Risk-off groups have underperformed over the last month and for the year, paced by a 9.4% drop in the Utilities sector.
Here are the key data releases and events to keep on eye on in the coming days.