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The Markets This Week

June 18, 2014 | Weekly Commentary

News of violence and political upheaval dominated headlines last week, causing stocks to tumble after a three-week winning streak.

Sunni militants inspired by al Qaeda captured two cities in Iraq, as the Iraqi government scrambled to defend Baghdad with help from Iran. The sudden strife caused oil prices to spike, with Nymex crude futures rising 4.1% to $106.91 per barrel, their highest level since September.

There was stateside news spooking some investors as well. Virginia primary voters chose a little-known college professor over Rep. Eric Cantor, the second-most powerful member of the House. The Tea Party victory signals that partisan gridlock is likely here to stay, and could spill over into a nasty debt-ceiling battle next year.

For the week, the Dow fell 148.54 points, or 0.9%, to 16,775.74. The Standard & Poor’s 500 fell 13.28 points to close at 1936.16, and the Nasdaq Composite dropped 10.75 points, or 0.2%, to close at 4310.65.

There was no frenzied selling—trading volume remains just above the lows for the year, and there’s little indication that it’ll be ramping higher.

“You’re in the beginning of the summer doldrums,” says John Canally, an investment strategist. The World Cup, which began last week, may have added another distraction. Multiple strategists we spoke to admitted they had one eye on the games during what technically should be considered working hours.

The traders who weren’t engaged in the Beautiful Game were mostly in a selling mood. “The instability in Iraq and the sudden change in the energy market were disruptive and they weren’t in anyone’s forecast,” says Tobias Levkovich, the chief U.S. equity strategist at Citigroup.

Thirty or 40 years ago, this kind of shock in the energy market would have moved stocks more, argues Canally. But our transition to a service economy from one based on manufacturing, plus increasing domestic oil production, soften the impact of changes in oil prices.

Other data points also proved bearish, with the University of Michigan consumer-sentiment gauge falling in June despite expectations it would rise, and May retail-sales growth disappointing the Street.

Strategists tend to see stocks moving up through the summer and the end of the year, although they don’t see spectacular gains. The S&P 500 is already up 4.75% for the year, and is within spitting distance of the end-of-year targets analysts had projected at the start of the year. But corporate earnings were surprisingly strong in the first quarter, growing about 5%, Levkovich notes. And investors still seem to think stocks are more attractive than just about any other asset class; equity-fund inflows rose sharply last week.

“The case for a summer melt-up remains stronger than that for a summer melt-down, as the high-liquidity, low-growth backdrop forces investor cash levels down,” writes Bank of America Merrill Lynch chief investment strategist Michael Hartnett.

(Source: Barrons Online)

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