What I’m watching This Week – 31 May 2016

The Markets (as of market close May 27, 2016)

Stocks enjoyed one of their best weeks in months as each of the indexes listed here posted gains last week. Some positive economic data, particularly in the housing sector, along with higher oil prices may have influenced the favorable returns. The Dow and S&P 500 each gained over 2.0%, while the Nasdaq and Russell 2000 ended the week up close to 3.50%. Only the Nasdaq remains behind its end-of-year closing value, although it closed the gap with last week’s performance.

Crude oil (WTI) closed at $49.56 a barrel last week, up $1.89 over the prior week’s closing price. The price of gold (COMEX) fell by last week’s end, selling at $1,215.30 by late Friday afternoon, down from the prior week’s closing price of $1,252.90. The national average retail regular gasoline price increased to $2.300 per gallon on May 23, 2016, $0.058 above the prior week’s price but $0.474 below a year ago.

Market/Index 2015 Close Prior Week As of 5/27 Weekly Change YTD Change
DJIA 17425.03 17500.94 17873.22 2.13% 2.57%
Nasdaq 5007.41 4769.56 4933.50 3.44% -1.48%
S&P 500 2043.94 2052.32 2099.06 2.28% 2.70%
Russell 2000 1135.89 1112.28 1150.45 3.43% 1.28%
Global Dow 2336.45 2287.28 2344.41 2.50% 0.34%
Fed. Funds rate target 0.25%-0.50% 0.25%-0.50% 0.25%-0.50% 0 bps 0 bps
10-year Treasuries 2.26% 1.84% 1.85% 1 bps -41 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

  • According to the Bureau of Economic Analysis, the second estimate of the gross domestic product for the first quarter increased at an annual rate of 0.8%. The first estimate for the fourth quarter had the GDP increasing at an annual rate of 0.5%. According to the report, the increase in the second estimate is primarily attributable to an adjustment in private inventory investment, which decreased less than originally estimated. In the fourth quarter, GDP increased 1.4%. The increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures (PCE), residential fixed investment, and state and local government spending that were partly offset by negative contributions from nonresidential fixed investment, exports, private inventory investment, and federal government spending. Imports, which are a subtraction in the calculation of GDP, decreased.
  • Speaking on a panel at Harvard University, FOMC Chair Janet Yellen intimated that interest rates may be increased in the coming months. “It’s appropriate, and I’ve said this in the past I think, for the Fed to gradually and cautiously increase our overnight interest rate over time, and probably in the coming months such a move would be appropriate.”
  • Sales of new single family homes rose by 16.6% in April over March–the fastest pace in eight years–according to the Census Bureau. At an annual rate of 619,000, new home sales are 23.8% above the April 2015 estimate of 500,000. The median sales price of new houses sold in April was $321,100; the average sales price was $379,800. The seasonally adjusted estimate of new houses for sale at the end of April was 243,000, which represents a supply of 4.7 months at the current sales rate.
  • Further evidence of an improving real estate sector, the National Association of Realtors® reported that pending home sales rose 5.1% in April–their highest level since February 2006. The Pending Home Sales Index reached 116.3 in April following an upwardly revised 110.7 in March, and is 4.6% above April 2015. The index is based on the number of reported contract signings, with closing expected to occur within four to six weeks. According to Lawrence Yun, NAR chief economist, “The building momentum from the over 14 million jobs created since 2010 and the prospect of facing higher rents and mortgage rates down the road appear to be bringing more interested buyers into the market.”
  • New orders for manufactured goods in April were better than expected, as the Census Bureau reported that orders for durable goods increased $7.7 billion, or 3.4%, from the prior month. Shipments of durable goods also increased 0.6% in April following two consecutive months of decreases. Unfilled orders were up 0.6% and new orders for nondefense capital goods (ranging from construction equipment to computers) increased 7.8%. However, excluding aircraft, nondefense capital goods orders actually decreased 0.8% and are down 4.1% over the past four months compared to the same four-month period last year.
  • The trade deficit grew by roughly 3.4% in April from March as U.S. imports exceeded exports by $57.5 billion compared to the March balance of $55.6 billion. The Census Bureau’s advance report on international trade in goods showed April’s exports totaled $119.3 billion, with imports coming in at $176.8 billion. However, foreign trade picked up overall as imports increased by 2.3% over March, while exports grew by 1.8%.
  • Consumers were more positive in their assessment of the economy in May, according to the latest report from the University of Michigan. The Index of Consumer Sentiment increased from 89.0 in April to 94.7 in May. Both the Current Economic Conditions Index (109.9) and the Index of Consumer Expectations (84.9) increased in May. According to the report, “there have only been four prior months since the January 2007 peak in which the Sentiment Index was higher than in May 2016, all recorded at the start of 2015.”
  • For the week ended May 21, there were 268,000 claims for unemployment insurance, a decrease of 10,000 from the previous week’s unrevised level. The advance seasonally adjusted insured unemployment rate remained at 1.6% from the prior week’s unrevised level. The advance number for continuing unemployment insurance claims for the week ended May 14 was 2,163,000, an increase of 10,000 from the previous week’s revised level.

Eye on the Week Ahead

Following the Memorial Day holiday, the week begins with a report on consumer income and spending, which includes the core personal consumption expenditures index–a closely watched indicator of inflationary trends. The week also brings the latest information on the manufacturing sector as revealed through surveys of purchasing managers. The week closes with the important employment situation report for May, which includes information on the unemployment rate, payrolls, and average hourly earnings.