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After four weeks of gains, market pulls back slightly

Investors have had a good run for the past several months, particularly in the last four weeks, but that good run has come to a whimpering end.

MANHATTAN (CN) — Wall Street took a breather from four straight weeks of gains as indices fell slightly on the heels of a few reports showing declines in manufacturing and producer sentiment.

Earlier in the week, markets continued their upward creep, but on Friday that changed, with the Dow Jones Industrial Average losing 292 points by 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, the former shedding 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-largest decline the index has seen since its inception in July 2001 and the weakest it has been since May 2020 when it was nearly negative 50 points. Not only that, but business activity also fell sharply in the Empire State, with new orders falling to -29.6 from 6.2 in July.

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

He added: “So, go on and continue to debate the semantics of whether we’re in a recession or not but we should be paying much more attention to the trajectory of economic activity and this was an ugly report.”

Equally disappointing was the home sales report from the National Association of Home Builders, which showed that 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 straight month that builder confidence has fallen and the first time since May 2020 the index fell below its break-even measure. The trade group chalked it up to higher borrowing costs, persistent supply chain issues, and increased interest rates.

“Tighter monetary policy from the Federal Reserve and persistently elevated construction costs have brought on a housing recession,” NAHB Chief Economist Robert Dietz said in a statement. “However, as signs grow that the rate of inflation is near peaking, long-term interest rates have stabilized, which will provide some stability for the demand-side of the market in the coming months.”

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

Some leaned into the data as proof the U.S. economy is not in a recession and that GDP growth will pick up in the third quarter. “Consumers remain resilient in the face of sticky 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 the gains in retail sales have been driven by inflation and not volume since the retail gains have largely kept pace with price increases. Inflation ending July 2022 is up 8.5% since May 2021, roughly the same amount as retail sales over that period.

Undisputedly, however, the data show some good nuggets, as the drop in gasoline prices in recent months have helped keep most retail sectors going strong. Michael Pearce at Capital Economics wrote that revisions to May’s retail sales highlights that “consumption growth has held up better than previously thought and suggests the risks to our forecasts that GDP growth will rebound to 2% in the third quarter lie to the upside.”

Minutes from the Fed’s meeting last month did not quell some concerns from investors, either. During that meeting, the central bank hiked interest rates by 0.75%, its second of the year in its attempt to aggressively curb inflation. Experts practically guarantee the Fed will again raise rates when it meets in late September in order to get the federal funds’ interest rate to a “neutral level,” though debate exists over whether that means another 75-basis-point or merely a 50-basis-point increase.

According to the Fed’s minutes from the July 26-27 meeting, “some participants emphasized that the real federal funds rate would likely still be below shorter-run neutral levels after this meeting’s policy rate hike,” indicating some Fed members remain hawkish. Other members clearly remain dovish, as the minutes note that, due to the “constantly changing nature of the economic environment,” the Fed could tighten rates “by more than necessary to restore price stability.”

Experts now are laser focused on the Fed’s much-anticipated Jackson Hole meeting in September to glean more hints on where the central bank plans to go on interest rates by the end of 2022.

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