The Markets:

Stocks entered the holiday weekend down on worries that the Fed might cut back its quantitative easing. For the week, the S&P 500 dropped 1.07%, the Dow lost 0.33%, and the Nasdaq lost 1.14%.[1]

Fed officials went into a full-court communications press as markets wobbled on fears the Fed might begin shuttering its bond-buying program. To counter these worries, Fed officials stressed that there is no rush to exit and that the program is not on “autopilot;” rather, bond purchases will be scaled up or down as future conditions warrant. In a speech before the Joint Economic Committee, Fed Chairman Ben Bernanke warned that premature tapering could stall the recovery and reiterated that any tightening of monetary policy would be cautious and considered.[2]  While it’s good news that the Fed isn’t rushing for the exits, we can expect additional volatility in the coming months as markets prepare for the end of easy Fed money.

While markets reacted poorly to the Fed’s news, economic data last week was generally positive. The number of Americans applying for unemployment benefits fell last week, pointing to continued resilience in the jobs market despite the effects of sequestration. The improving employment picture is also propping up the housing market and consumer sentiment, with rising home prices supporting consumption and keeping Americans upbeat. The drop in unemployment claims erased most of the previous weeks’ increase and indicates that employers are not laying off workers despite the fiscal austerity.[3]

Markets will be very focused on the economy this week, as a number of important economic reports are due to be released, including: consumer confidence, revised Q1 GDP, housing reports, and weekly jobless claims. The Thursday jobs report, the last one before the June 7th release of the May jobs report, will be closely watched as traders look for clues about final May numbers. The May report is the next major milestone for the Fed since it has targeted a 6.5% unemployment rate as part of its mandate. If there is significant improvement over the 165,000 new jobs created in April, we can expect the Fed to look for confirmation over the next few months and begin to talk more seriously about tapering the bond program.[4]

Headlines:

Durable goods orders rise. A surprisingly high increase in orders for long-lasting factory goods suggests that a manufacturing slowdown may be ending. New orders for factory goods rose 3.3% in April, roundly beating estimates of a 1.5% increase.[5]

Public schools spent less per student in 2011. In a sign that the Great Recession has reached public school budgets, a Census report shows that the amount per student spent by schools fell in 2011 for the first time in more than 30 years. Overall, nationwide school spending dropped less than one percent per student, but the number reflects greater declines in certain geographic areas.[6]

China’s factory activity shrinks in May. Chinese factory production fell for the first time in seven months, indicating that its economic recovery may have stalled and another recession may be imminent. Since China is largely a manufacturing-based economy, policy makers must decide whether to act now to boost growth or risk a cool-off while laying groundwork for long-term economic activity.[7]

Oil prices drop on weak economic outlook. Brent crude dropped close to $102 per barrel after disappointing economic data from China and high oil supplies in the U.S. forecasted softer demand. Weaker demand and ample gasoline stockpiles in the U.S. might mean lower oil prices this summer.[8]

Disclaimers and Sources:

Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Diversification does not guarantee profit nor is it guaranteed to protect assets. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.  The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896. The Nasdaq Composite is an index of the common stocks and similar securities listed on the NASDAQ stock market and is considered a broad indicator of the performance of stocks of technology companies and growth companies. The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indexes from Europe, Australia and Southeast Asia.

The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

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[1] http://briefing.com/investor/markets/weekly-wrap/weekly-wrap-for-may-20-2013.htm

[2] http://www.reuters.com/article/2013/05/23/us-fed-bullard-idUSBRE94M0GO20130523

[3] http://www.reuters.com/article/2013/05/24/us-usa-economy-idUSBRE94M0K220130524

[4] http://www.cnbc.com/id/100764914

[5] http://www.reuters.com/article/2013/05/25/us-durable-goods-idUSBRE94N0FR20130525

[6] http://www.cnbc.com/id/100765235

[7] http://www.reuters.com/article/2013/05/23/us-china-economy-flash-pmi-idUSBRE94M02720130523

[8] http://news.yahoo.com/brent-drops-towards-102-weak-demand-outlook-hurts-081811016.html