Dollars and Sense: Falling into fall

Not with a bang. The week, and the month, ended not with a bang, but with a whimper, at least on the stock market. The Dow slid more than 5 percent during August. Of course, it’s still way up for the year, and it’s more than doubled in the past four years, so a 5 percent correction over a 30-day period is not a cause for concern. But it does suggest the markets have finally taken a bit of a breather.

A break, or a breakdown? The question is: Is this downturn indeed just a breather in a long-term run-up, or the beginning of a downturn? It’s too early to tell, but there’s no question concern that the Federal Reserve is going to end its bond-buying scheme is causing the downward drift. On Monday, for example, the market was up even though the main news of the day was a report saying orders for durable goods fell more than expected last month, down 7.3 percent—the largest drop in nearly a year. That’s not good news for the economy, but it was for speculators, who hope the Fed will keep pouring $85 billion a month into the markets. As we’ve said before, the Fed tail continues to wag the economic dog.

Encouraging signs. So, ironically, the August droop is actually a sign the economy is getting better, and we got more data to that effect this week. The Commerce Department said on Thursday the U.S. economy grew at a 2.5 percent annual rate during the second quarter, much better than the previous estimate of 1.7 percent. Also, the Labor Department said the number of people who filed for unemployment benefits last week fell to 331,000, the fewest in five years.

Syria. It’s been surprising to some that the markets aren’t reacting more strongly to the news from Syria. They haven’t been completely indifferent, but the effect has been interesting to watch. Normally, when an international crisis breaks out, stocks retreat and gold advances. That’s what happened on Tuesday, when the United States said all evidence pointed to Syria’s use of chemical weapons. It looked like retaliatory or punitive military action by the U.S. was imminent. So U.S. stocks dropped significantly on Tuesday, and oil and gold prices went up. But the U.N. sent in chemical weapons inspectors, and the U.S. had trouble building an international consensus, so it looked like a military strike might not be so imminent. Also, the rise in oil prices actually helped some energy companies, so Tuesday’s drop attracted buyers back into the equity markets. In short, the crisis in Syria became little more than a buying opportunity.

Falling into fall. So are we going to see the doldrums of August continue into September? I doubt it. Monday is Labor Day, and the markets are closed, but beginning on Tuesday the economic news comes at us fast and furious. We’ll get a lot of monthly reports, including the one everyone will be watching—the unemployment report. That comes next Friday. But between now and then, we’ll see August automobile sales, the Institute for Supply Management’s Index, construction spending, factory orders, and trade balance numbers. All of this in a four-day week. Most analysts are predicting a volatile fall. And even though astronomically speaking autumn doesn’t begin until September 22, economically speaking, it begins on Tuesday.

Listen to WORLD's Warren Cole Smith talk about this week's financial news on The World and Everything in It: