Weekly Market Commentary July 27, 2015

The Dow Jones Industrial Average fell 518 points for the week, down -2.9% to 17,569. The S&P 500 Index was off 2.2% to 2,080.   The Nasdaq Composite fell -2.3% to close at 5,089. The S&P MidCap 400 Index closed the week at 1,477, down 2.1%. The Russell 2000 dropped -3.2% to end the week at 1,226.   The MSCI ETF "EFA", the proxy for developed international equity markets, lost -2.2% for the week. Emerging markets, as represented by the MSCI ETF "EEM", were down a steep 4.4% for the week.   Domestic High Yield corporate bonds were negative, down 1% for the week, as measured by the Bank of America Merrill Lynch US High Yield Master II Index.   Mixed earnings reports from some large companies dragged down domestic stock indices for the week.  Globally, a commodities slump and poor manufacturing data out of China also caused stocks to sell off.                           

The yield on the benchmark 10-year US Treasury note fell to 2.26%.  Oil prices sunk to fresh lows after an unexpected increase in US inventories.  West Texas Intermediate fell firmly below the key $50 mark, down to around $48 a barrel.  Brent Crude was down as well, to approximately $54.50 a barrel.  Despite the depressed prices, OPEC producers continue to pump, producing a three-year high 95 million barrels per day, with Saudi Arabia contributing a record 10.6 million barrels.  Fitch Ratings increased its 2015 US high-yield default outlook to 2.5%-3% from 1.5%-2%, reflecting the impact that "languishing oil prices, weak coal demand, and burdensome regulation have had on energy and metals/mining companies during the first half of the year."  After prior week's $1.2 billion inflow, cash flows to the high-yield sector slowed a bit, with high-yield bond funds posting a net inflow of $82 million for the week ended July 22nd.  High-yield bond issuers cautiously returned to the market for the week ended July 17th, issuing $4.175 billion in new debt over eight transactions, six of which were from energy companies. 

In US economic news, weekly jobless claims fell by a steep 26,000 to a 42-year low of 255,000.  The less-volatile fourweek moving average was down 4,000 to 278,500.  Investors largely disregarded the dramatic headline number, as July weekly data is typically volatile due to auto industry retooling for new model year production, which results in temporary layoffs.  

Continuing claims, reported on a one-week lag, fell 9,000 to 2.207 million.  Existing home sales data was strong, up 3.2% in June to an annual rate of 5.49 million, the highest level since February 2007.  Year-on-year sales are up 9.6%.  Median home prices are at a record level of $236,400, being driven higher by the continuing decline in distressed sales.  New home sales data, however, was weak in June, declining -6.8% to an annual rate of 482,000.      

In international economic news, the Caixin China Manufacturing Purchasing Managers' Index fell to 48.2 in July, down from 49.4 in June.  The Caixin PMI is skewed towards private firms, unlike than the official PMI, which favors large state companies and which is scheduled to be released next week.  A reading above 50 indicates expansion from the previous month, while a reading below 50 indicates contraction.  The poor reading is concerning, considering the great lengths that the Chinese government has gone to in an effort to keep growth at 7%.   In corporate news, earnings season turned mixed after a slew of companies reported this week.  

Apple exceeded analysts' expectations for earnings and revenue, but the stock fell sharply after the company revealed it missed iPhone sales targets.  Amazon posted a surprise profit after sales rose 20% year-on-year.  General motors, Visa, Coca-Cola, and Starbucks also posted strong earnings; while Caterpillar, IBM, Yahoo, Microsoft, 3M, and American Express all disappointed.