The majority of economic reports released last week indicated the economy continues to grow and strengthen. Bond yields dropped and Homebuilders’ confidence soared. Initial jobless claims fell. And the bell-weather Philadelphia manufacturer index came in at a much higher reading than expected. Moody’s, the bond rating agency, raised America outlook to “stable” from “negative”.
On the negative side, Detroit declared bankruptcy – the biggest ever municipal bankruptcy in the U.S. Gas prices rose $.10 per gallon last week. Housing starts and retail sales results disappointed.
Category Archives: economy
The Economy
Reports issued last week continued to indicate the economy is growing, but at a slow pace – much slower than normal for this phase of an economic rebound. An underlying warning signal appeared – if interest rates on mortgages continue to rise, the economic recovery, anemic as it is, will be placed in danger.
The Economy
The big news last week was the report on jobs here in the U.S. The good news: This was the best first half for private employment gains since 1999. Also hourly and weekly wages increased 0.4% in June, and hourly wages are now up 2.2% over the last year (weekly wages are up 2.5% year-over-year).
Some bad news: a lower percentage of the 25 to 54 year old group (prime working age) were employed and the number of part time workers (for economic reasons) increased. (Source: Calculated Risk).
The Markets This Week
It’s the middle of the armpit-soaking summer, a time when investors usually lather their portfolios with SPF 50 and let them relax until fall. But traders remained active last week, even as a strong jobs report made it more likely that the Federal Reserve will slow its asset purchases.
The second half of the year has begun, and so far it’s a lot like the first half.
For the week the Dow rose 226.24 points, or 1.52%, to 15,135.84. The Standard & Poor’s 500 added 25.61 points to close at 1631.89, and the Nasdaq Composite gained 76.13 points, or 2.24%, to close at 3479.38.
Bond yields and Treasury notes are still on the rise, with the 10-year yield climbing 0.23 percentage point on the week to 2.72%.
The Labor Department said Friday that the economy added 195,000 jobs in June, and it revised its May and April employment estimates upward by a total of 70,000 jobs. Nonfarm payrolls have now risen by an average of 202,000 jobs per month this year. The market initially hesitated on the news. Job growth appears to be consistent and relatively robust, which means the Fed has another excuse to slow down its asset-buying program. But after that initial hiccup, stocks rose in the afternoon, and the Dow ended the day 147 points higher.
Strategists and investors we talked to this week, however, remained uneasy. As the Fed takes the economy’s training wheels off, there may be considerable wobbles ahead.
“The economy is pretty clearly creating enough jobs for the Fed to begin to taper,” said John Canally, an investment strategist at a major financial services firm. “I’m not so clear that will lead to a stronger economy. The job market might just be playing catch-up. You might get a situation where the Fed is tapering, but GDP growth is still below their forecast” ( Source: Barrons Online).
The Economy
Data released last week was mixed:
Housing and consumer confidence data released Tuesday was strong (good news),
but first quarter GDP released Wednesday was revised down to 1.8% from 2.4%
(bad news). The stock market ended higher on both days.
The Economy
Last week, the retail sales report and the US Weekly jobs claims showed improvement. Additionally, small business optimism improved. The inflation rate dropped. All of these reports were good news; but the stock market and bond market have both chosen to ignore these reports and focus on the FED’s anticipated statement and press conference this coming week – they are nervous.
The Economy
Two research notes released this week indicate the fiscal drag is hitting hard right now and is expected to fade towards the end of the year. Right now it looks like Q2 is tracking close to 2% GDP growth. Earlier this year, we expected fiscal policy to weigh on growth most heavily in Q2 and Q3, when sequestration, other federal spending reductions, and the recent tax increases looked likely to have their greatest combined effect. It now looks like the fiscal drag will be somewhat more spread out than we anticipated.
From economist Alec Phillips at Goldman Sachs:
My interpretation of these reports is the U.S. consumer will continue to be challenged by higher taxes and lukewarm job prospects. For this reason, I continue to hold my grade of C for the CONSUMER (see above).
The Economy
Last week, on the “good news” side of the ledger, U.S. weekly jobless claims come in at their lowest reading since January 2008. German factory orders for March grow 2.2% versus expectations of a decline of 0.5%. And, Bank of Korea joins the party, cuts key interest rate to 2.5% from 2.75%. Housing remains a strong positive force as Mortgage Bankers Association mortgage applications climbed 7% week-over-week, rising for the 5th consecutive week. But on the negative side, April retail sales gained 2.8% v expectations of +3.5% and Wholesale sales came in weak, falling 1.6% month-over-month versus expectations of 0.1% growth. (Source: Big Picture).
The Markets This Week
It has become a familiar refrain this year but one that’s by no means unwelcome: Stocks hit record highs last week. The Dow Jones Industrial Average closed above 15,000 for the first time, and equities rose about 1% on a lack of bad news, on decent earnings and economic news, and perhaps from just plain habit. Nothing seems to unnerve this market; old bogeymen, like European debt woes and North Korean saber-rattling, remain locked in the basement for now, says Jonathan Corpina, a senior managing partner at Meridian Equity Partners. The worry, if there were one, is that such concerns could return and swat the market during the soon-to-arrive languid summer months, a time when markets traditionally look for things to worry about, Corpina adds. For now, investors are busily rotating out of defensive stocks, he says, and moving money into technology and financial shares. Our guess is that only a sudden swoon will change that. On the week, the Dow closed at 15,118.49, up 145 points, or 1%, and an all-time high. The S&P 500 increased 19 points, to 1633.70, also a new high-water mark. The Nasdaq Composite index jumped 1.7%, or 58 points, to 3436.58. With the Dow up 15% already this year, it’s getting tougher to find relatively cheap stocks inside this 30-member and exclusive megacap club. The average 2013 ratio of price/earnings per share for the index is now about 14, with a high of 21.5 times for Home Depot (ticker: HD) and a low of six for Hewlett-Packard(HPQ), according to Thomson Reuters. The average earnings-per-share growth expected this year is just 3%. For investors looking at the Dow now, it’s worth noting that in the past three weeks the broad market has seen a rotation into stocks in sectors like tech, up 9%; materials, up 7%; and energy, up 6%. Concurrently, defensive sectors that have been popular all year—consumer staples, health care, and telecoms—have begun to trail the market. That could represent a shift to a search for growth from a search for yield Source: Barrons Online).
The “Heat Map”
Most of the time, the U.S. stock market looks to 3 factors to support its upward trend – let’s grade each of the factors: CONSUMER SPENDING: I grade this factor a C (neutral). THE FED AND ITS POLICIES: I grade this factor an A+ (extremely favorable) because the FED cannot do much more than it is doing to support the stock market and asset prices. BUSINESS PROFITABILITY: I grade this factor a B+ (favorable). Many of the biggest companies in the U.S. reported their first quarter profits last week. Surprisingly, many beat their forecasted profits. The scoreboard with two-thirds of the S&P 500 companies reporting their earnings: 70% have beat their earnings estimates. And, the S&P 500 will likely report record earnings for this quarter. If this trend holds for the next two weeks, we will raise this grade. NOTE: the above grades remain unchanged from last week.