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After four weeks of gains, the market pulls back slightly

Investors had a good run over the past few months, especially the past four weeks, but that good run ended with a groan.

MANHATTAN (CN) — Wall Street took a breather after four straight weeks of gains as indices fell slightly on the heels of a few reports showing weaker sentiment from manufacturers and producers.

Earlier in the week, markets continued their rally, but on Friday that changed, with the Dow Jones Industrial Average losing 292 points at the closing bell – 55 points for the week. The S&P 500 and Nasdaq also fell on Friday to end the week on a losing note, with the former losing 52 points while the latter fell 342 points.

On Monday, the Federal Reserve Bank of New York’s manufacturing index for August fell more than 42 points into negative territory, the second biggest drop the index has seen since its inception in July 2001 and the lowest since May 2020 when it was almost minus 50 points. Not only that, but business activity also fell sharply in the Empire State, with new orders falling to -29.6 from July’s 6.2.

Most analysts grimaced when the report came out. Peter Boockvar, chief investment officer at Bleakley Advisory Services, wrote in a note to investors that “we of course still have many more regional manufacturing surveys to look at to see if this is a one-off event. or not, but such a rate of change is unlikely to be isolated to this region.

He added: “So go ahead and keep debating the semantics of whether we’re in a recession or not, but we should be paying a lot more attention to the trajectory of economic activity and that was an ugly report. “

Equally disappointing was the National Association of Home Builders’ home sales report, which showed existing home sales fell in July to the lowest level since the early days of the Covid-19 pandemic in 2020.

The report also marks the eighth consecutive month of declining builder confidence and the first time since May 2020 that the index has fallen below its breakeven point. The trade group attributed it to higher borrowing costs, ongoing supply chain issues and rising interest rates.

“The Federal Reserve’s monetary policy tightening and persistently high construction costs have caused a housing slump,” NAHB chief economist Robert Dietz said in a statement. “However, as signs are mounting that the inflation rate is near its peak, long-term interest rates have stabilized, which will provide some stability on the demand side of the market in the months ahead. coming.”

Other data points this week were less dismal. Retail sales showed a slight improvement and beat analysts’ expectations, gaining 0.8% month over month in July, according to the US Census Bureau. Total sales from May 2022 to July 2022 increased by 9.2% compared to the same period of 2021.

Some have looked to the data as proof that the US economy is not in recession and that GDP growth will resume in the third quarter. “Consumers remain resilient in the face of persistent inflation,” said Cliff Hodge, chief investment officer at Cornerstone Wealth, though he also noted that, “in an environment where good economic news is bad news for markets, the argument for a new bull market is further diminished.

Others, like Boockvar, say retail sales gains were driven by inflation, not volume, as retail gains largely kept pace with price increases. Inflation ending in July 2022 is up 8.5% since May 2021, roughly the same amount as retail sales over this period.

Undoubtedly, however, the data is showing some good nuggets, as falling gasoline prices over the past few months have helped keep most retail sectors strong. Michael Pearce of Capital Economics wrote that the May retail sales revisions underscore that “consumption growth has held up better than previously thought and suggests that risks to our forecast that GDP growth will rebound to 2% in the third quarter are on the rise”.

Minutes from last month’s Fed meeting also failed to allay some investor concerns. During this meeting, the central bank raised interest rates by 0.75%, its second of the year in its attempt to aggressively curb inflation. Experts all but guarantee the Fed will hike rates again at its late September meeting to bring the fed funds interest rate back to a “neutral level”, although debate exists over whether that means another 75 basis points or simply a 50-. increase in basis points.

According to the minutes of the Fed’s July 26-27 meeting, “some participants noted that the real fed funds rate would likely still be below near-term neutral levels following this meeting’s policy rate hike,” indicating that some Fed members remain hawkish. Other members clearly remain dovish, as the minutes note that due to the “ever-changing nature of the economic environment,” the Fed may tighten rates “more than necessary to restore price stability.”

Experts are now focusing on the highly anticipated Fed meeting in Jackson Hole in September to glean more clues about the direction the central bank plans to take on interest rates by the end of 2022.

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