MANHATTAN (CN) — Markets were able to recover some of what they lost during the midweek selloff amid the August doldrums on Wall Street, as investors are almost assured of tapering soon by the Federal Reserve.
By the closing of trading on Friday, the Dow Jones Industrial Average had gained 224 points, but it was still down nearly 397 points for the week. The S&P 500 gained 35 points to finish out the week down 27 points, while the Nasdaq increased 172 on Friday but declined 108 for the week.
On Tuesday, the markets snapped a five-day winning streak and dropped sharply, though they recovered somewhat before the closing bell. For the day, the Dow had shed nearly 300 points, with the S&P 500 and Nasdaq seeing similar falls. Wednesday saw an even greater drop for the Dow, which lost 383 points.
The sell-off was likely due to the reported drop in retail sales last month, with the U.S. Census Bureau showing a 1.1% decline in retail sales in July. Once again auto sales helped lead the drop, showing nearly a 4% month-over-month drop due to the increase in new vehicle prices. Other areas that saw notable drops in retail spending were sporting goods, which fell 1.9%, and the 2.6% decrease in clothing.
“The 1.1% month-over-month fall in retail sales in July could be a sign that the rapid spread of the delta coronavirus variant is convincing some consumers to stay away from public spaces again and is consistent with real consumption growth slowing sharply in the third quarter,” wrote Andrew Hunter, senior economist at Capital Economics.
But Hunter also pointed to the 1.7% increase in spending at bars and restaurants and the 3.1% decrease in online sales, saying these make it hard to blame the pandemic for shooing people out of the marketplace. “Either way, recent data suggest that the spread of the delta variant has driven a renewed plunge in consumer confidence in early August, suggesting that retail spending will remain under pressure,” he wrote.
Overall retail sales are well above what they were during summer 2020, with auto sales up 35.7% year over year, the 70% increase in clothing sales, and the 30.5% increase in restaurants and bars.
Others say the fall on Tuesday and Wednesday is part of the typical turbulent August. “Bottom line, attendance is light due to the summer holiday, volumes are thin, and this market remains complacent and vulnerable due to ‘air pockets,’” wrote Tom Essaye of the Sevens Report. “And while that might continue for a few days, nothing that’s happened makes us suddenly more cautious near term.”
While the news about booster shots being required to combat the delta variant is not good, Essaye said, he also noted that corporate earnings remain solid and expects that investors’ decisions have already baked in the growing consensus that the Federal Reserve will begin tapering its bond-buying programs later this year.
According to minutes from the last Federal Open Markets Committee meeting last month, released this week, members are still debating when to start tapering, with hawks wanting to do it yesterday and doves eyeing early 2022.
While “most” members believed the Fed could begin tapering this year, some members stated employment has not yet hit the central bank’s employment goals. "Looking ahead," according to those minutes, "most participants noted that, provided that the economy were to evolve broadly as they anticipated, they judged that it could be appropriate to start reducing the pace of asset purchases this year because they saw the Committee’s ‘substantial further progress’ criterion as satisfied with respect to the price-stability goal and as close to being satisfied with respect to the maximum-employment goal.”
If current numbers continue, the Fed may soon hit its goal. Unemployment claims dipped below 350,000 during the week ending August 14, showing that fewer claims are being filed. The numbers elicited a celebratory tweet from President Biden, who wrote the data “reflects the important progress we’re making in our economic recovery.”
On Friday, the U.S. Bureau of Labor Statistics also reported that unemployment rates were lower in July among 17 states and stable in 33 states, with the 5.4% national unemployment rate now half a percentage point lower than June. The highest unemployment rate is in Nevada, which is at 7.7%, though it is closely followed by California, New Mexico and New York. Nebraska and Utah have the lowest rate, at 2.3% and 2.6%, respectively.
Investors now await the central bank’s annual Jackson Hole symposium next week, though some still hold it will be largely a nonevent. Kevin Wong, a market analyst at CMC Markets, wrote that the central bank has “well telegraphed” its intentions to prepare markets, noting the U.S. treasuries market remains virtually unchanged the last few days while equities have slid.
The last so-called “taper tantrum” in May 2013, Wong wrote, was due to then-Fed Chair Ben Bernanke unexpectedly announcing during a congressional hearing that the central bank would be backing out of markets. Investors fled on the surprise news, and the Fed took notice.
“Given such adverse and violent reactions seen in the financial markets, the Fed has learned a lesson not to make or avoid any unexpected announcements on its [quantitative easing] asset purchase program,” he wrote, adding that a “parade” of Fed officials over the last two months have set the stage for tapering in late 2021 or early 2022.
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