Dollars and Sense: Positive economic news prods the bears

Quiet week. This week was a fairly quiet one on Wall Street, but that’s about what we expected. Second-quarter earnings season is just about over. Congress is not in session. A lot of traders and analysts are on vacation. So the market kind of drifted.

Downward drift. Of course, that drift was mostly downward. Monday, Tuesday, and Wednesday were all down days. Tuesday’s downward move was significant, more than 100 points for the Dow. It was the only real fireworks we had this week, and it came because Federal Reserve official Charles Evans said economic growth should let the Fed reduce its $85 billion in monthly bond purchases later this year. Evans is president of the Chicago Federal Reserve Bank and a voting member of the Federal Open Market Committee, the Fed’s policy-making committee, so his words carry some weight in the market. He expects growth in the second half of the year to pick up to an annual rate of 2.5 percent and climb above 3 percent next year. He said the Fed could then taper its asset purchases in several stages, and likely end them by mid-2014. Once again, we hear that the economy is getting better and that drives the stock market down: Another example of the Fed tail wagging the economic dog.

Some real news. So did we see any real economic news this week? We got a better-than-expected Institute for Supply Management services sector report. The Institute for Supply Management (ISM) said its services index rose to 56 from 52.2 in June, easily topping economists’ expectations for 53. A reading above 50 indicates expansion in the sector. It was a good report, though Tim Nieves of the Institute for Supply Management called it a “spike” and said we need to string a number of these good reports together before we can call it a trend.

Earnings up. I mentioned above that corporate earnings season is about over, so you might be asking: How’d we do in the second quarter? So far, more than 80 percent of the S&P 500 companies have reported second-quarter results. Sixty-eight percent topping earnings expectations and 55 percent beat revenue estimates, according to the latest data from Thomson Reuters. If all remaining companies report earnings in line with estimates, earnings will be up 4.2 percent from last year’s second quarter. And that’s pretty good.

A quiet week ahead? I doubt it. For one thing, we get a lot more economic news this week. On Tuesday, we’ll get retail sales numbers for July. That report often moves the markets. On Wednesday, we’ll get the producer price index and on Thursday the consumer price index. And on Friday, housing starts and building permits. So it’s a pretty big week for economic news. Of course, it’s still summer and Congress is still in recess, but we’ll likely start hearing about what Congress will do when it comes back in session in September. Senators such as Mike Lee, R-Utah, and Ted Cruz, R-Texas, have threatened to hold up a budget deal if it includes money for Obamacare. At this point, it doesn’t look like they’ve got enough support even in their own party to make that happen, because of the possibility of a government shutdown and the likelihood that Republicans would get blamed for it. But these guys are brilliant and effective at stirring up public opinion, so I’d keep an eye on the budget debate in the weeks ahead. It could move the markets, and—at a minimum—provide entertainment.