Markets show life while consumers hold back

By from Russ Koesterich, BlackRock’s Global Chief Investment Strategist

Stocks rebound as the world settles down

US stocks, bonds and the dollar all advanced last week, albeit for different reasons. The tech-heavy Nasdaq Composite Index led the pack, climbing 4.24% to close the week at 5,210, while the Dow Jones Industrial Average rose 1.83% to 18,086 and the S&P 500 Index advanced 2.41% to 2,126. Meanwhile, the yield on the 10-year Treasury fell from 2.41% to 2.34%, as its price correspondingly rose.

Equities rebounded following progress in Greece, stabilization of China’s market and solid company earnings in the US But the advance in bonds was mostly due to another week of mixed economic figures. The data, in turn, illustrate a basic contradiction for 2015: With the US economy showing signs of life, why aren’t US consumers spending?

Mixed data reveal hesitant consumers

Risk appetite returned to the markets last week as investors took some solace in the fact that the Greek parliament cleared its near-term hurdle of passing a series of austerity and reform measures. This allowed the European Central Bank (ECB) to modestly raise the assistance to Greek banks. Events in China also settled, with that equity market stabilizing, at least temporarily.

Finally, stocks also received a boost on favorable earnings numbers from several marquee companies, notably JPMorgan and Google. The gains were most visible in more volatile sectors, particularly biotech, technology and banks. Gold and oil stocks were notable laggards, with both sectors struggling as the dollar pushed to its highest level since April.

Treasuries also advanced, albeit for different reasons. Federal Reserve (Fed) Chair Janet Yellen’s testimony before Congress laid out a fairly upbeat assessment of the economy and left the door open for a September rate hike, but investors are still trying to digest the implications of mixed economic data.

Housing numbers were strong, but once again consumer activity remained soft. The latest evidence was the June retail sales report. June’s negative sales numbers were well below expectations, and the previous months’ reports were revised lower. Despite continued improvement in the labor market and lower gasoline prices, consumers are not responding with open wallets. At 1.4% year-over-year, adjusted retail sales growth is close to its lowest level since 2009.

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