U.S. equity markets have managed, against all odds, to put together a five-week winning streak, despite the headwinds to the economy.  In the absence of compelling data, can stocks continue to rally? 

The Big Picture 

Despite slower global economic growth, especially in Japan and China, and continued Euro zone woes, stock indices are defying not only fundamentals but gravity.  Not even evidence of more financial shenanigans – from the London whale to “Liborgate” – can dent investor confidence.  It’s as if all the bad news has been priced into the market. 

With second quarter earnings season just about over, investors appear to have accepted slower corporate profit growth.  Even with lowered expectations, results were mostly positive and warnings going forward were par for the course. 

With a weak labor market and little evidence of an increase in hiring, consumer spending is tepid at best.   The drought across much of the country will translate into higher food costs and the lack of corn to divert into ethanol has pushed gasoline prices 30-cents per gallon higher in just the last month.  The national average for regular unleaded is now $3.70/gal, a dime higher than a year ago. 

As Washington prepares for the upcoming Republican and Democratic conventions, the focus now shifts to competing visions of government policy and the looming “fiscal cliff” of spending cuts and tax increases if no compromise can be found.  

I, Investor  

All of that masks a stock market where values are attractive, corporate balance sheets and fundaments are in good shape and little to no inflation exists despite an extremely accommodative Federal Reserve monetary policy. 

Some of the data on tap this week and next may support stock prices.  Tomorrow’s release of July retail sales and producer prices should show a benign outlook on wholesale inflation.  Wednesday’s consumer price data will reflect the impact of higher gas prices on retail inflationary pressures.  Industrial production and capacity utilization data will reflect the higher demand for energy in drought stricken parts of the country. 

Weekly jobless claims on Thursday should continue to show a downward trend in layoffs and translate to the type of job gains we saw in July.  Housing continues to be a drag on the economy, but housing starts data also out Thursday may offer a glimmer of hope.  August Philadelphia business conditions will also be scrutinized. 

This week’s economic calendar ends with the University of Michigan’s preliminary August consumer sentiment survey while the Conference Board releases its leading economic indicators series for July. 

Next week’s calendar is very light.  Wednesday, August 22 sees July existing home sales data along with the minutes of the most recent Federal Open Market Committee meeting.  Thursday it’s weekly jobless claims as well as new home sales for July. Durable goods orders report for July is the only piece of data on Friday, August 24. 

With less than compelling data and the last two weeks of summer upon us, look for trading range behavior, barring any “headline risk”.    The major indices are all trading above their 50-day and 200-day moving averages but, with light participation and low volume, don’t expect much movement to the upside.

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