Profit taking on overbought conditions sent the market lower this week:
Nasdaq 100...1,575 -0.9%
S&P 500...1,299 -0.9%
S&P Midcap 400...739 -2.0%
S&P Smallcap 600...364 -1.6%
On Tuesday, St. Louis Fed President William Poole said on Bloomberg TV that the economy is on an even keel and that inflation is well-controlled. That led investors to conclude that the Fed may not go too far with its tightening campaign.
Declining oil prices affirmed the notion that inflation is in check. Crude dropped 0.9% to $68.59 a barrel. News that Chevron (CVX), Devon Energy (DVN), and Statoil (STO) found a major new oil source in the Gulf of Mexico provided weight on the price. Despite the excitement, the discovery won't have a meaningful impact on the global market for quite some time.
Technology performed well, sending the Nasdaq into positive territory for the year. Intel's (INTC) then-pending announcement of a workforce reduction attracted bargain hunters to the chip sector. Broadcom (BRCM) gained 4%.
The Dow ended the day flat while the Nasdaq gained 0.6%.
On Wednesday, a red sun rose on Wall Street and its name was Unit Labor Costs. How appropriate that during the week of Labor Day, the Labor Dept. reported that workers are becoming a big expense. Second quarter unit labor costs were revised up dramatically from a 4.2% estimate to 4.9%, putting the year-over-year increase at 5%. That's the highest it's been since 1990. In addition, the first quarter was revised again, from an initial 2.5% estimate to 9%.
The report pilloried the recent sense that inflation is receding. In the words of Econoday Senior Economist Mark Rogers, These two revisions paint a very different picture for the Fed in its evaluation of underlying inflation trends and how far the economy needs to decelerate. Of course labor costs are just one part of the inflation equation - but it is a significant part.
Sellers sounded their trumpets and marched onto the floor, flags proclaiming The Fed Ain't Done, Son. Technology was the prime target as August's best performing sector: Seagate (STX) -8.1%, Broadcom -5.4%, Intel -3.4%, among others. Even news of Intel's job cuts couldn't offset the pressures, particularly since the firm cut fewer workers than some analysts had hoped.
The big reaction to the unit labor cost data was surprising because it's old Q1 and Q2 information. We've already seen more recent readings showing that inflation is coming under control. More than anything, the market was probably just ripe for some selling, and the report provided the excuse.
The Dow lost 0.6% and the Nasdaq lost 1.7%. Declining stocks outnumbered advancing stocks by 3-to-1 on the NYSE and 2-to-1 on the Nasdaq.
The slide continued on Thursday when San Francisco Fed President Janet Yellen said the tendency should be toward future rate hikes until inflation clearly subsides. She said that inflation is still a bit above my comfort zone.
Homebuilders maintained their drumbeat of negative news when KB Home (KBH) and Beazer Homes (BZH) both reduced their earnings expectations. That hurt both financial companies and materials stocks, but sent homebuilding stocks themselves up.
The worst of all worlds would be rising inflation against a slowing economy. That's the song Thursday's data sang, although we should bear in mind that it was only for a day. Coupled with the prior day's losses, though, it was enough to erase a large amount of August's gains.
Technology extended the prior day's losses: Palm (PALM) -7.9%, Broadcom -3.8%, eBay (EBAY) -2.4%, Yahoo (YHOO) -2.3%.
The Dow lost 0.7% and the Nasdaq lost 0.6%.
Friday brought some reprieve, but not enough to clean up the week.
Oil prices provided good news all week. Rising inventories, a mild hurricane season so far, and a slackening of demand now that summer is over combined to send prices down $2.91 to close the week at $66.33 a barrel. That's 15% below their July 14 high of $78.40 and the lowest they've been since April 4. This provides some inflation relief.
Also, Cleveland Fed President Sandra Pianalto said it was important that the Fed anchor inflation expectations in order to best promote sustainable economic growth and that last month's pause was appropriate. Any Fed comment containing the word pause is filed in the positive folder.
Homebuilder Lennar (LEN) lowered its Q3 earnings forecast, providing the third such warning in three days from the housing sector. Stuart Schweitzer, a global markets strategist at J.P. Morgan, said that these warnings are a sign that the damage on the rest of the economy is all still in front of us.
Investors waded right back into what they'd shunned in the prior two days: eBay +3.6%, Flextronics (FLEX) +2.1%, Intel and Yahoo both +1%. McDonald's (MCD) rose 2.7% to a new 52-week high.
The Dow and Nasdaq each gained 0.5%.
While this week didn't see a dramatic breakdown in the market, the Dow, Nasdaq, and S&P 500 all broke below the trend from their July lows. I've been encouraging a cautious stance, and continue believing that cash, patience, and a shopping list are what investors need most right now.