Despite the fact that last week was a shortened trading week, it was full of market-moving news.
The Dow Jones Industrial Average plunged 180-plus points on more upbeat new home sales and consumer confidence results. March’s durable goods orders were also revised higher. Some took this as a sign that the U.S. economy is back on track, which will compel the Fed to raise rates sooner, rather than later.
For the record, I don’t agree. Both Federal Reserve Chairwoman Janet Yellen and Vice Chair Stanley Fischer have announced that they will not raise rates until there’s further improvement in the labor market and there’s 2% annual inflation.
In the middle of last week, stocks rebounded on a series of strong earnings reports and mergers and acquisitions news. All of the excitement in the tech sector pushed the Nasdaq Composite to an all-time high.
On May 28, the benchmark indices ended lower. That day, the National Association of Realtors reported that its Pending Home Sales Index rose 3.4% to 112.4 in April, up from a revised 108.7 in March. Pending homes sales are now up 14% in just the past 12 months and running at the highest level in nine years.
The housing market is one of the few bright spots in the economy right now. As I covered last week, declining payrolls, waning consumer confidence and the ballooning trade deficit are weighing on economic growth.
Speaking of which, on Friday, the Commerce Department revised its estimate for first-quarter GDP to a -0.7% annual pace, which is lower than its initial estimate of a 0.2% rise. The primary factors were the surging trade gap and lower-than-estimated inventories.
These factors will also likely weigh on second-quarter GDP growth. Economists are now expecting the economy to grow at an annual rate of 1% or less in the second quarter.
There is no doubt that disappointing GDP growth is taking a toll. So, the “data dependent” Fed cannot raise key interest rates amid all this economic uncertainty and negative GDP growth.
Almost every day a major government agency or private organization releases new information covering the status of some pocket of the economy. I’m here to help you sift through the barrage of economic data out there and determine what this will mean for your stocks.
Durable Goods Orders
What It Measures: Orders are a leading indicator of manufacturing activity. So, every month the Census Bureau and the Commerce Department measure the dollar volume of orders, shipments and unfilled orders of durable goods.
Durable goods are those that last at least three years. This report is different from the Factory Orders report, which covers both durable and non-durable goods.
The Breakdown: In April, orders for durable goods slipped 0.5%, which was in line with economists’ expectations. Core orders, which excludes aircraft and military goods, increased 1% and exceeded economists’ estimates for a 0.3% rise. March’s core orders were revised higher to a 1.5% increase, up from the previously reported 0.5% decline.
The Bottom Line: Milder weather, the ports reopening on the West Coast and the U.S. dollar retreating recently all contributed to the rise in core orders. This is an encouraging development and should help support economic growth in the second quarter.
New Homes Sales
What It Measures: This report, released by the Commerce Department, shows how many new privately owned single-family houses were sold and for sale for in the past month. The report also calculates median home price, which is an indicator of inflation in the housing sector.
Personally, I prefer the existing homes sales report because its data pool is four times larger, but new home sales is still an important gauge of the housing market’s health.
The Breakdown: In April, sales of new homes jumped 6.8% to an annual rate of 517,000 units, while the median price of a new home increased 8.3% to $297,300. This beat the consensus estimate for a rate of 508,000 units. In the past year, new home sales are up 26.1%. March new home sales were revised to a rate of 484,000 units, up from the previously reported 481,000.
The Bottom Line: Sales of new homes still remains below the historical average (an annual rate of 711,000 units), and inventory of new homes is still low. However, low interest rates and an improving job market are bringing buyers back into the market. So, this was another encouraging report.
Consumer Confidence
What It Measures: The Consumer Confidence report is somewhat self-explanatory. Every month, the Conference Board surveys 5,000 households to figure out consumers’ take on current conditions as well as their expectations for the future.
The expectations index makes up 60% of the total measurement because it is a better leading indicator than the current conditions index, which makes up the remaining 40%. This survey helps forecast sudden shifts in consumption patterns, but only changes of at least five points should be considered significant.
The Breakdown: In May, the Conference Board’s Consumer Confidence Index increased to 95.4, falling just short of economists’ estimates for a reading of 96.1. The index’s April reading was revised lower to 94.3, down from 95.2.
Breaking it down further, only 25.2% of consumers said business conditions were “good,” while those who said conditions were bad fell to 17.4%. On the job front those who said there was an abundance of jobs rose to 20.7%, up from 19%, but 27.3% said jobs were “hard to get.”
The Bottom Line: While the report overall was pretty mixed, it’s encouraging that the Consumer Confidence Index increased in May. Consumers are still cautious but growing more confident in the second quarter.
Initial Claims for Unemployment
What It Measures: It is an indicator of the direction of the job market. Increases in jobless claims show slowing job growth; decreases in claims signal accelerating job growth. On a week-to-week basis, jobless claims are volatile, and therefore, one of the best ways to track this measure is to look at the four-week moving average.
It usually takes a jump or decline of at least 30,000 claims to signal a meaningful change in job growth.
The Breakdown: According to the Labor Department, initial claims for unemployment increased 7,000 to 282,000 for the week ended May 23. This missed economists’ estimates for 270,000 claims. For the week ending May 16, claims were revised up by 1,000. The four-week moving average rose to 271,500.
The Bottom Line: While jobless claims have ticked higher the past two weeks, they have remained below the 300,000 threshold for the past 12 weeks, which is a sign that the labor market is slowly improving.
First-Quarter GDP (Second Estimate)
What It Measures: Gross Domestic Product shows the big picture. Annualized quarterly percent changes in GDP reflect the growth rate of total economic output. Of course, this report can move the market up or down, depending on the data.
The broad components of GDP are: consumer spending (consumption), investment, net exports, government purchases and inventories. Consumer spending is by far the largest component, totaling roughly two-thirds of GDP. Quarterly GDP reports are broken down into three announcements: advance, preliminary and final.
After the final revision, GDP is not revised again until the annual benchmark revisions each July. If you only have time to focus on one economic report, this is it.
The Breakdown: The Commerce Department reported this morning that first-quarter GDP contracted, down to a -0.7% annual pace. This is down significantly from the initial estimate of 0.2% growth. This was slightly better than economists’ expectations for a -1% decline.
The Bottom Line: The U.S. economy slipped in the first quarter due to the surging trade deficit and smaller-than-previously-estimated inventories. Exports contracted -7.6% in the first quarter and are a much bigger problem than the west coast port slowdown.
Economists are now estimating second-quarter GDP to only grow at a 1% annual rate. Disappointing GDP growth will likely weigh on the Fed’s ability to raise interest rates this year.
University of Michigan’s Consumer Sentiment Index (Final)
What It Measures: The University of Michigan index is almost identical to the Conference Board index, though there are two monthly releases, a preliminary and final reading. Like the Conference Board index, it has two subindices — expectations and current conditions.
This index has increased its influence of late on Wall Street and has the ability to move the market up or down. Consumer confidence is hard to nail down. So, keeping track of both reports is important.
The Breakdown: The University of Michigan’s Consumer Sentiment Index finished the month of May at a 90.7 reading. This is down from April’s 95.9 reading and the lowest reading since November.
The Bottom Line: Mixed economic data and slowing GDP growth appear to have weighed on consumers’ minds in the past month. As a result, consumers are less optimistic about the U.S. economy right now, with only 56% stating that the economy is improving, which is down from 68% at the beginning of 2015.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
