David Joy: Markets shrug off worries, at least for now

Since its recent low on Aug. 27, the S&P 500 climbed a little more than 2% through midday on Monday, Sept. 9. In the process, it has moved back above its 50-day moving average, after first piercing it on the downside on Aug. 16 during its recent pullback from a record high on Aug. 2.

Investors are behaving as if to say, “We’ll worry about Syria and the Fed when we have to. In the meantime, recent economic data from around the globe has been encouraging, and stocks look attractive.”

Of course, there is always the chance of a diplomatic solution to the Syrian issue, and there is also the likelihood that most of the reaction to Fed tapering has already been priced into the market. Whatever ultimately happens, each day lately it seems that concern over either of these issues is declining.

New Signs of Strength in China and Elsewhere
Worries about China slowing have been dispelled recently by improved readings on manufacturing and exports. The Shanghai Composite index has climbed more than 5% in the past week in response. Emerging markets overall are higher by 5% in the past week and a half.

In Japan, second quarter growth was revised higher, and July industrial production and consumer inflation reports were encouraging for the third quarter. The Nikkei index has risen 6% to begin September.

In the Eurozone, manufacturing, and confidence surveys have risen, as have retail sales. The Stoxx 600 index is up almost 3% this month.

And in the United States, both the manufacturing and service components ISM indices in August were their strongest in years. Vehicle sales, jobless claims, construction spending and unit labor costs were all encouraging as well. It was only the August jobs report that was weaker than expected, including the downward revisions from the prior months. Nevertheless, stocks still managed to hold their own on Friday.

Bonds Underperform Stocks
Bond yields eased after Friday’s jobs report cast some doubt on the timing of Fed tapering. After closing at 2.99% on Thursday, the yield on the ten-year note ended the week at 2.93%, and drifted lower on Monday, to 2.90%.

This move has eased some of the concern that inexorably rising interest rates would seriously dent housing activity, not to mention motor vehicle sales. In a measure of the lack of financial stress and fixed-income investor concern, the relationship of Treasuries to high yield has not changed much in the recent past. As Treasury yields were pushing higher from the end of July through last week, their option-adjusted spread to high yield bonds had widened from 450 basis points to 482 as of Aug. 27, as high yield bonds saw their own yield-to-maturities rise.

Since then, however, that trend has reversed somewhat, with the spread closing last week at 463. At this time last year, the spread was closer to 600 basis points. So far this month, the underperformance of bonds versus stocks has continued, as the Barclays U.S. High yield index total return is fractionally lower, with a total return of -0.02%. The U.S. Aggregate index is down 0.86%, and the Barclays Municipal Bond index is down -0.32 %.

The domestic economic calendar is relatively light this week. The August retail sales report on Friday tops the list, and is expected to show modest growth versus July. Weekly jobless claims the day before will be watched carefully as the last look at the labor market prior to the Fed meeting next week. Industrial production and retail sales reports from China are on the calendar, as is industrial production in the Eurozone.

Especially as the week progresses, however, the Fed and Syria will become the larger focus. All else will take a back seat until these issues are resolved. The ability of equity markets to look beyond both will be tested.

Disclosure
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.

The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.

The Shanghai Composite Index is a capitalization-weighted index of all stocks on China’s Shanghai Stock Exchange.

The Nikkei index is a price-weighted average of 225 stocks of the first section of the Tokyo Stock Exchange.

The STOXX Europe 600 Index is derived from the STOXX Europe Total Market Index (TMI) and is a subset of the STOXX Global 1800 Index. With a fixed number of 600 components, the STOXX Europe 600 Index represents large, mid and small capitalization companies across 18 countries of the European region.

Barclays Capital U.S. Aggregate Bond Index: Is an unmanaged index composed of securities from the Barclays Capital Government/Corporate Bond Index, Mortgage-Backed Securities Index and the Asset-Backed Securities Index.

Barclays Capital Municipal Bond Index: Is a market-value-weighted index for the long-term tax-exempt bond market.

The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.

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