For the mid-week ending June 25, 2014, the S&P500 reached all-time highs yesterday (1,968.17) before dropping over 13 points in what looked like a possible start to a correction. Today, both GDP and Durable Goods Orders were below expectations causing the markets (prior to the Open) to drop. During the day, the markets rebounded with the S&P ending the day up 9.55 points to 1,959.53.
First quarter GDP fell -2.9 percent, far below last month's estimate of -1.0 percent. The major stock indices reacted immediately by dropping into the red, then reversed at the Open. In an interview with the Chief Investment Officer at Federated Investors, Stephen Auth said he believes the underlying trends of first quarter GDP was masked by bad weather, and expects second quarter GDP should exceed 4 percent.
Another important economic report, Durable Goods Orders, dropped -1.0 percent (+0.4 percent expected) as demand for military equipment sharply fell. The good news is that orders actually increased 0.6 percent when military equipment orders are excluded. The sharp fall in defense equipment was expected since it surged in April.
The situation in Iraq continues to evolve. There are reports that Syrian fighter planes attacked Iraqi cities just across the border, which are under the control of ISIS (Islamic State in Iraq and Syria). This supports the notion that the unrest in Iraq and the civil war in Syria are intertwined.
Ukraine is also experiencing further turmoil as militants shot down a Ukrainian helicopter late yesterday. This incident occurred just after a cease-fire was declared by Ukraine's President Petro Poroshenko with pro-Russian separatists on Friday. Nine people were killed when a portable missile brought down the Mi-8 helicopter near Slovyansk.
With geopolitical events in Iraq and Ukraine heating up, the drop in the major indices on Tuesday, and the end of the second quarter approaching, we expect volatility to pick up for the remainder of this week. Pundits are still expecting the S&P to hit 2,000 by the end of this month.
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