Unusual, but it happened—the S&P500 fell two weeks in a row, this time dropping about 0.75% on modest volume. The consecutive weekly drop has only happened a handful of other times in all of 2014. Normally, last week would have been the time to start the rebound, but not this time. Volatility dipped to suggest that fear was not driving the sell-off, and volume was lighter than one would expect during a down week; this also suggests that investors were not rushing for the exits.
The picture drawn by technical analysis has essentially not changed very much. Sure, on a short-term (ie. daily) basis, stock prices are still showing signs of weakness—for example, prices last week dipped below the 50 day moving average and have not recovered (they closed just below). But the larger picture is still fairly bullish—the 50 day moving average is solidly above the 200 day moving average and the 200 day moving average is unmistakably sloping upward. To repeat, both these measures need to reverse for the end of this bull run to be acknowledged by most technicians.
In macro news, personal income and personal spending only met expectations. On the other hand, pending home sales massively disappointed, as did the latest Case-Shiller home price index report, the Chicago PMI and consumer confidence. Also missing expectations were PMI manufacturing, ISM manufacturing, factory orders, ISM services, and construction spending. On the brighter side, initial jobless claims slightly beat consensus estimates and nonfarm payrolls came in somewhat better than expected. In terms of jobs, what was not well reported was the fact that the labor force participation rate fell again, setting another multi-decade low. This means that fewer and fewer people who can work are actually working—and the simple fact that they’re not looking for work means that they’re technically not “unemployed”. This makes the improving unemployment rate look far better than it actually would be in the millions of people who’ve dropped out of the workforce started to look for work.
Finally, there are more troubling signs in the markets, not equity markets but commodity markets. Copper prices are continuing to creep down. Palladium prices, also used in manufacturing, took a nosedive over the last couple of weeks. Iron ore prices are near multi-year lows. And most importantly, crude oil prices a falling fast, down from almost $110 per barrel (West Texas Intermediate) to under $90 at the end of last week.
What does all this mean? It usually suggests that a global economic slowdown is coming. Why global? Because these commodity prices are set by producers and buyers around the world, and lately signs coming out of China—-the greatest engine of global growth over the last 10 years—are suggesting that a major slowdown is possible.
So as the US economy hobbles along, and Europe’s economy stagnates, Asia’s largest economy looks like it’s about to roll over. Over the last 5 years, central bank money creation has prevented major economic, financial and market dips from mushrooming. But now that the Federal Reserve is only weeks away from ending its latest QE program, and no other major central bank stepping into its shoes to fill the QE void, global economies and markets may just have to try to stand on their own two feet.
But the latest signs from the commodities markets are hinting that these economies and markets may start getting sick without a continuous flow of central banking medicine.