S&P 500 Tops 2,000… Now What?

Ukraine, and now ISIS, loom; Economy grows 4.2%

Market view from LMK Financial

Despite volatility around geopolitical concerns and sluggish growth in Europe, U.S. stocks had a phenomenal week, lifting the S&P 500 to a new record close, and giving the index its best August performance since 2000. For the week, the S&P 500 picked up 0.75%, the Dow grew 0.57%, and the Nasdaq gained 0.92%.

The Ukrainian crisis ratcheted up to a new level of tension as reports emerged that Russian forces have actively invaded eastern Ukraine and are engaging local forces. Although Russian and Ukrainian leaders met last week, the two sides appear more fiercely opposed than ever. It’s hard to know how Russia’s ambitions in the region will affect markets, but interruptions in gas supplies will not be good for Europe’s economy.

Investors got their second look at Q2 Gross Domestic Product (GDP) numbers and cheered at the news that the economy grew 4.2% (upgraded from 4.0% in the initial estimate). Even better, growth appears to be broad-based and spread among multiple sectors of the economy. This result indicates that the economic recovery is entering a sustainable cycle of growth, where improvement in one area of the economy feeds growth in another. Let’s hope so.

Looking at Jobs… and then the Fed decides

...the economic recovery [may be] entering a sustainable cycle of growth, where improvement in one area of the economy feeds growth in another. Let's hope so

Looking ahead, the first week of September is packed with important data. Friday’s August jobs report is especially critical because it could shed some light on the timing of the Federal Reserve’s interest rate hikes. Investors will also have their eyes glued to Thursday’s European Central Bank meeting, seeking a response to the EU’s stalled recovery and dwindling economic hopes.

Geopolitical concerns around Ukraine, Syria, and Iraq will also likely continue to dominate headlines, and volatility is to be expected. European leaders are considering a fresh round of sanctions against Russia, which may cause volatility as investors think about how sanctions may affect global growth.

All told, new record highs and low summer trading volume may transform into additional volatility and more activity in coming weeks. Depending on how these variables play out, a short-term pullback is also possible as investors take profits off the table. This is simply the nature of the investor sentiment pendulum that swings between optimism and pessimism, driving overall buying and selling activity. While we believe that additional upside may be possible this year, we caution our clients to expect periods of volatility as major events shift investor sentiment.

ECONOMIC CALENDAR:

  • Monday: U.S. Markets Closed for Labor Day Holiday
  • Tuesday: PMI Manufacturing Index, ISM Mfg. Index, Construction Spending
  • Wednesday: Motor Vehicle Sales, ADP Employment Report, Factory Orders, Beige Book
  • Thursday: International Trade, Jobless Claims, Productivity and Costs, ISM Non-Mfg. Index, EIA Petroleum Status Report
  • Friday: Personal Income and Outlays, Chicago PMI, Consumer Sentiment