Market watchers had more than a few descriptive adjectives to add to their repertoire, borrowed from headlines pertaining to the positive nature of ISM manufacturing numbers on Tuesday. The first reading above 50 at 52.9 for the month of August, ending 18 months of contraction, held an impressive 9.6% pop in new orders. Further positive news for the bulls came in the form of a pending home sales report, citing 3.2% monthly gains, yet the S&P 500 lost 2.5% to close below 1000 at 998.
The headline which broke the buyers' stride centered around rumors that a financial institution may be headed into bankruptcy. What didn't make headlines was the ICSC same store sales report, which cited a poor -0.7% decline against comparable 2008 sales, and a truly dismal Redbook report of a 4.1% yearly sales decline. While these figures have been crying out that the consumer continues to retreat throughout the past couple months, the "inventory rally" has continued to lift equity valuations to incredulously high figures.
Adding insult to injury, the ADP Employment report showed a significantly larger than expected number of unemployed workers at nearly 300,000 additional jobless individuals for August, compared to estimates near 250k. Similarly disconcerting were implications derived from a manufacturing orders report, where the increase in factory orders increased by only 1.3% rather than an estimated 2.3% increase. More than just a consensus miss, the report suggests that while accounting for a 4.9% spike in aircraft and automobile orders the future of the manufacturing sector may be less optimistic than previously foreshadowed by the ISM report. Strong response to the CARS (Cash For Clunkers) program and a bottleneck within Boeing's production pipeline bear responsibility for the advances in durable goods orders and are not indicative of sustainable growth in the sector.
The "inventory rally" has run its course and investors will now focus more on the potential within a jobless, cost conscious and fearful consumer base. Friday's August Employment Report will surely move security valuations of equities, commodities and debt as movers and shakers strive to catch the next trend before it occurs. Will "leveling out" manufacturing and housing markets allow for enough jobs and wealth to be preserved and convert consumers from savers to buyers? The next six months will decide as the third quarter performance and the looming holiday season will weigh the true strength of the U.S. economy and equities moving forward.
