After spending weeks bouncing around just under 1,900, the S&P 500 finally managed to top it on Friday, setting a new record closing high in the process. And after a lot of back and forth at the beginning of the week, the Nasdaq and the Russell 2000 small caps rebounded strongly from their travails of recent weeks, though the small caps are still down for the year.
||As of 5/23
Last Week’s Headlines
- Discussion among members of the Federal Reserve’s monetary policy committee has begun to turn to how best to manage the impact of the end of supportive economic measures, whenever that seems appropriate. According to minutes of the committee’s most recent meeting, the state of the labor market was a major point of debate and will continue to play a major role in Fed policy.
- As more homeowners put their houses on the market in April, sales of existing homes rose 1.3% over the course of the month. It was the first monthly increase this year, but the National Association of Realtors® said that still left home resales 6.8% lower than the previous April.
- New home sales also jumped in April; the Commerce Department said they were up 6.4% for the month, though that was 4.2% below April 2013.
- Parties campaigning on anti-European Union themes gained ground in the EU’s parliamentary elections over the weekend. However, a majority of seats are still held by mainstream parties, so financial assistance programs for weaker members shouldn’t see any immediate disruption.
- Credit Suisse agreed to pay $2.5 billion to settle federal charges that for decades it had helped Americans avoid taxes by concealing assets in undeclared bank accounts. The Swiss bank also pleaded guilty to a criminal charge of conspiracy.
- China’s manufacturing sector was on the brink of expansion in May, according to the Markit Purchasing Managers Index. The reading on the monthly survey hit a four-month high of 49.7% (a reading of 50% indicates expansion). China also gave Russia some relief from Western economic sanctions by signing a $400 billion agreement to purchase gas from Russia’s leading supplier.
- A Pennsylvania federal grand jury charged five members of a Chinese military unit with stealing industrial secrets by hacking computers at six U.S. enterprises in the nuclear, solar, and metals industries. The indictment is said to be the first involving a governmental body rather than an individual corporation.
Eye on the Week Ahead
During the holiday-shortened week, investors will assess the results of the EU elections. They also will get a second look at Q1 economic growth and a smattering of manufacturing, housing, and consumer data.
Equities were very much a mixed bag last week. After the Dow and S&P 500 set fresh all-time closing records early in the week, a strong downdraft on Thursday flattened out the S&P for the week and took the Dow back into negative territory year-to-date. The Nasdaq, which has suffered in recent months, saw a positive week, while the small-cap Russell 2000 ended the week down almost 9% from its March high. The pain in domestic equities left the Global Dow the year-to-date leader. Meanwhile, a rally in the 10-year Treasury sent the yield to its lowest level since last October.
Last Week’s Headlines
- After a strong surge in March, retail sales flattened out in April, rising just 0.1%. The Commerce Department said online sales, sales of electronics/appliances, and those at restaurants and bars all declined, while clothing, auto, and department store sales saw gains.
- Wholesale prices saw a sharp increase last month, rising at their fastest pace since September 2012. The Bureau of Labor Statistics said April’s 0.6% increase followed a 0.5% jump in March, and was evenly distributed between goods and services. April’s increase put wholesale inflation for the last 12 months at 2.1%.
- Consumer prices also increased in April at a rapid pace; the 0.3% increase was the biggest monthly jump since last June. A 2.3% increase in the cost of gas and a 0.4% increase in food (beef alone was 2.9% higher) were key. April’s increase put the consumer inflation rate for the last 12 months at 2%, which is the level the Federal Reserve has informally targeted as appropriate.
- The Federal Reserve’s manufacturing indexes were both positive in May. The reading on the Empire State index rebounded 18 points from a weak March, while the Philly Fed reading declined slightly but had its third consecutive positive month.
- U.S. industrial production fell 0.6% in April after a 1% gain in both February and March. The Federal Reserve said milder weather cut the need for heat, which led to a 5.3% decline in utilities output, while mining production rose 1.4%. Use of total capacity at the nation’s factories slid 0.7% and was 1.5% below its average over the last 40 years.
- Housing starts rose strongly in April, with a nearly 43% increase in apartment construction responsible for most of the gain. The Commerce Department said new starts were up 13.2% for the month, and were more than 26% higher than in April 2013. Building permits–an indicator of future activity–were up 8% from March and were almost 4% higher than a year earlier.
- The eurozone economy grew 0.2% during Q1, roughly the same pace as the previous quarter, while the 0.3% growth in the 28-member European Union was slightly less than the 0.4% of Q4 2013. The strongest growth was in Germany, Hungary, Poland, and the United Kingdom. The Q1 figure meant that the eurozone grew 0.9% (1.4% for the EU) compared to the same quarter a year earlier. Meanwhile, the official EU statistical office said the inflation rate rose slightly in both areas, to 0.7% in the eurozone and 0.8% for the EU. Though both inflation rates were an improvement, they were still far below those of the previous year, and the annualized rate for seven countries was negative.
Eye on the Week Ahead
In a week that’s light on economic data, minutes of the most recent Fed meeting, a report on Chinese manufacturing, and housing market statistics could receive more-than-usual interest.
A fresh closing high on the Dow on Friday finally enabled it to edge back into positive territory for the year, while the S&P 500 ended the week basically flat. However, after the prior week’s respite from selling pressure, the Nasdaq and the small caps of the Russell 2000 returned to their recent losing ways.
Last Week’s Headlines
- Growth in the U.S. services sector accelerated in April. The Institute for Supply Management’s gauge rose 2.1% to 55.2%. It was the 51st straight month of growth.
- Greater demand overseas for U.S. exports of natural gas and oil as well as aircraft helped cut the U.S. trade deficit by 3.6% in March, according to the Commerce Department. Exports were up 2.2%, while imports also rose 1.7% to their highest level in two years.
- Federal Reserve Chair Janet Yellen told a congressional committee that the Fed sees a rebound in the economy from winter’s weather-induced slump, but that low inflation and slack in the housing and labor markets will most likely continue to permit interest rates to remain near zero for some time.
- Yet another data point from the Federal Reserve confirmed winter’s impact on the economy during Q1. Business productivity slumped at an annualized rate of 1.7%, a far cry from the previous quarter’s 2.3% increase. However, productivity was 1.4% ahead of Q1 2013. Even though workers put in more hours during the quarter, reduced output helped push unit labor costs up 4.2% for the quarter.
- The European Central Bank once again left its key interest rate unchanged at 0.25% and said that ongoing low inflation might lead to stimulus measures next month, especially if the situation in Ukraine worsens.
Eye on the Week Ahead
With the bulk of Q1 earnings reports now in the rear-view mirror, investors will have to look to manufacturing and retail reports in both the United States and China for guidance. Inflation at both the consumer and wholesale levels is expected to remain subdued, while housing starts could show whether the housing market is emerging from its winter doldrums.
Generally encouraging data that suggested winter’s economic deep freeze might be thawing led to broad-based gains for equities despite some slippage at week’s end. The Dow finally managed to surpass briefly the record closing high it hadn’t seen since New Year’s Eve. However, of the four domestic indices, the S&P 500 remained the only one still in positive territory year-to-date. Meanwhile, the Fed’s steady-as-she-goes approach to tapering helped boost demand for the benchmark 10-year Treasury, whose yield fell to its lowest level so far this year.
Last Week’s Headlines
- As expected, economic growth stalled during the first quarter, falling from 2.9% in Q4 2013 to the current 0.1% (though that figure will be subject to two revisions over the next two months). The Bureau of Economic Analysis said lower exports, less spending by businesses on fixed investments and inventory, and reduced spending by local and state governments were key to the decline.
- The unemployment rate saw its biggest drop since December 2010, falling from 6.7% to 6.3% in April; that’s the lowest it’s been since September 2008. Also, the Bureau of Labor Statistics said the number of new jobs created–288,000–was far greater than the last 12 months’ 190,000 monthly average and represented the strongest job creation in more than two years. Gains were broadly distributed, led by employment in business and professional services, retail, restaurants/bars, and construction. However, the report wasn’t all good news; the drop in the unemployment rate resulted partly from 806,000 people leaving the labor force.
- Consumer spending rebounded from the previous two months’ deep freeze, rising an inflation-adjusted 0.7% in March. Even better, the Commerce Department said the spending was widespread, with the biggest gains in durable goods, which rose 2.7% (about half of which was purchases of cars and car parts). The bad news? Spending on durable goods was down 2.2% from the previous March, and one reason for March’s higher sales was a 0.5% jump in the cost of food. Nondurable goods were up 0.9% for the month, while spending on services rose 0.4% and personal income was up 0.5%.
- Business for U.S. manufacturers also accelerated coming out of the frigid winter. The April reading on the most recent Institute for Supply Management survey rose to 54.9%, its highest level since December, and all but one of the 18 industries reporting saw gains. In addition, the Commerce Department said orders at U.S. factories were up 1.1% in March; a 3.5% jump in business spending on capital equipment (not including the volatile aircraft sector) was the biggest increase in that figure since January 2013.
- Home prices in the cities tracked by the S&P/Case-Shiller 20-City Composite Index were relatively flat for the month, rising only 0.2% as 13 of the 20 cities showed declines. Also, the 12.9% year-over-year gain was slightly lower than the previous 12 months’ 13.2% increase.
- As expected, the Federal Reserve’s monetary policy committee once again cut its monthly bond purchases by $10 billion, leaving them at $45 billion a month. The committee also reiterated its belief that its target interest rate will remain at its current level well after bond purchases end.
Eye on the Week Ahead
With few economic reports on tap this week, investors’ focus could be overseas. Heightened tensions over Ukraine could counterbalance any data-induced optimism, as they did last Friday. Also, the European Central Bank will meet Thursday, when additional economic stimulus measures could be on the table.
The rotation out of momentum stocks that began in early March continued in April, hitting many of the tech and biotech high-fliers that had soared earlier in the year. That cost the Nasdaq and Russell 2000 dearly, leaving both with negative year-to-date returns. The Russell ended the month down 6.7% from its early March year-to-date high, while the Nasdaq slumped 5.6% over the same period. However, valuation concerns didn’t affect equities across the board. After setting a fresh closing high early in the month, the S&P 500 managed to hang on to its gains, emerging from April the clear year-to-date leader. Meanwhile, the Dow managed to squeak into positive territory for 2014 on the month’s final trading day by surpassing the all-time high it had not seen since New Year’s Eve. The Global Dow survived April’s volatility relatively well, especially considering geopolitical tensions over Ukraine.
Meanwhile, the rotation in equities, a steady hand at the Fed, and little inflation in sight helped keep the benchmark 10-year Treasury yield low. The price of gold backed off after a $43-an-ounce mid-month spike to end April just below $1,300 an ounce, while the price of oil hovered within a dollar or two on either side of $100 a barrel.
The Month in Review
- Economic growth stalled during the first quarter, falling from 2.9% in Q4 2013 to the current 0.1%. The initial estimate will be subject to two revisions over the next two months. The Bureau of Economic Analysis attributed much of the decline to lower exports, less spending by businesses on fixed investments and inventory, and reduced spending by local and state governments.
- The U.S. economy created 192,000 new jobs in March, and the Bureau of Labor Statistics revised its previous estimates for January and February upward. However, that did little to help the unemployment rate; because more people sought work, the unemployment rate remained stuck at 6.7%.
- Consumers emerged from hibernation, sending retail sales up 1.1% during the month. However, a 0.2% increase in the consumer inflation rate could have been responsible for a portion of the higher spending (retail sales aren’t adjusted for price increases). The Bureau of Labor Statistics said higher costs for food and shelter were responsible for much of the month’s increase in the Consumer Price Index, which put the inflation rate for the last 12 months at 1.5%. Meanwhile, wholesale prices, especially those for services, jumped 0.5% during the month.
- Manufacturing data was generally positive. Orders for big-ticket items were up 2.6%, and according to the Commerce Department, some of the biggest increases were in computers, electronics, and communications equipment. Industrial production also rose 0.7%, particularly in the mining and utilities sectors.
- Spring brought few signs of improvement in the housing market. The Commerce Department’s April release said new home sales plunged 14.5%, while the National Association of Realtors® said sales of existing homes were down by only 0.2%. Housing starts were up almost 3% from February, but down 6% from a year earlier. Home prices in the 20 cities tracked by the S&P/Case-Shiller 20-City Composite Index were basically flat for the month, and year-over-year gains were less robust than in previous months.
- As expected, the Federal Reserve’s monetary policy committee once again cut its monthly bond purchases by $10 billion, leaving them at $45 billion a month. The Fed also reiterated its intention to keep its target interest rate at its current level well after bond purchases end.
- The Chinese economy showed signs of slowing; the country’s National Bureau of Statistics said the 7.4% growth over the last 12 months was slightly less than the previous quarter’s 7.7%, and below the official 7.5% target rate. Also, exports were down 6.6% in March, while imports fell more than 11%.
- The European Central Bank kept its key interest rate unchanged at 0.25% despite a 0.5% inflation rate that raised concerns about the possibility of deflation there.
Eye on the Month Ahead
Investors will have to assess whether the recent slump in equities is a case of “sell in May, go away” coming early and whether recent selling has worked off concerns about overvaluation. European Union parliamentary elections on May 22-25 will be watched for signs of increasing anti-EU sentiment that could jeopardize support for the financial system there. The Fed’s monetary policy committee will take a break in May, leaving investors to focus on economic data, earnings, and geopolitical considerations.