Last week was another busy week on Wall Street and Main Street. Of course, the biggest headlines of the week were falling interest rates, Federal Reserve Chair Janet Yellen’s testimony to Congress and a slew of economic reports.
It looks like the low interest rate environment is set to persist for the foreseeable future. Yields around the globe continued to collapse last week as the German five-year bond slipped further into negative territory to -0.08%. Debt investors are now increasingly betting on an economic rebound rather than actual interest rates.
Federal Reserve Chair Janet Yellen also spoke with Congress last week — and as expected, her comments continued to be dovish. Janet Yellen noted that the U.S. economy is improving, and that’s she’s pleased with the gains in the job market. The unemployment rate currently stands at 5.7%, which is just slightly above the Fed’s target range between 5.2% and 5.5%.
However, Yellen also stated that there are pockets within the U.S. economy that remain weak, namely housing and wage growth. So, an interest rate hike isn’t likely in the offing just yet.
In fact, Yellen noted that the Fed would remain patient, but the word “patient” would be removed in an upcoming statement. This doesn’t mean rates are headed up; rather, the Fed plans to discuss a rate hike on a “meeting-by-meeting” basis.
Since deflation is running rampant, virtually no one expects the Fed to take action. Fed Presidents from Boston, Chicago and Minneapolis all agree that the Fed shouldn’t raise rates in 2015. So, the Fed isn’t seriously discussing raising key interest rates any time soon.
Almost every day a major government agency or private organization released new information covering the status of some pocket of the economy. So, let’s sift through the barrage of economic data out there and determine what this will mean for your stocks.
Existing Home Sales
What It Measures: The report is a good indicator of activity in the housing sector. Aside from total sales, two other indicators are worth watching in this report: the inventory of homes for sale and the median price.
The Breakdown: The National Association of Realtors announced that sales of existing homes declined 4.9% to a 4.82 million annual pace in January. This was below economists’ estimates of a 4.95 million pace. Meanwhile, December existing home sales were revised higher from 5.04 million to 5.07 million. The inventory of existing homes remains tight. At the current sales pace, it would take 4.7 months to sell all of the homes currently on the market, a 2.1% drop from a year ago.
The Bottom Line: The bad news is that this is the slowest sales pace since May. The good news is that sales are still 3.2% higher than they were a year ago. For the most part, the pullback in home sales was expected. January tends to be a volatile month for the housing market, and the recent bout of bad winter weather depressed sales in the Northeast.
Consumer Confidence Report
What It Measures: What this report measures 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 February, the Conference Board’s consumer confidence index dipped to a 96.4 reading. Meanwhile, the index’s January reading was revised higher from 102.9 to 203.8. Breaking it down, the current conditions index fell from a revised 113.9 in January to 110.2 in February. Meanwhile, the six-month expectations index retreated from 97.0 to 87.2, as fewer of the surveyed consumers expected conditions to improve.
The Bottom Line: I wouldn’t read too much into this; consumer confidence is still at prerecession levels. Some economists attribute the drop in consumer confidence to media sensationalism, because consumers are suddenly worrying about the economy and the availability of jobs. There is no doubt that the news media, especially the financial news media, likes to dwell on negative news and ignore positive news.
New Home 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 this is still an important gauge of the housing market’s health.
The Breakdown: In January, sales of new homes inched down 0.2% to a seasonally adjusted annual rate of 481,000. This surpassed economists’ expectations of a 450,000 annual rate. December new home sales were revised slightly from 481,000 to 482,000. At the current sales pace, there are enough homes on the market for 5.4 months.
The Bottom Line: New home sales are growing at a faster pace than existing home sales, having risen 5.3% over the past year. And December’s revised sales pace represents the highest level of growth since June 2008. The fact that new home sales kept going strong despite the unseasonably cold winter is a great sign.
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, so 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 30K claims to signal a meaningful change in job growth.
The Breakdown: For the week ending February 21, initial claims for unemployment unexpectedly jumped to a seasonally adjusted rate of 313,000, 31,000 higher than the prior week. Economists forecasted that claims would rise to a 290,000 annual rate, so this was a larger jump than expected. Meanwhile the four-week moving average increased by 11,500 from the previous week’s revised average.
The Bottom Line: While the initial claims are up more than expected, the overall trend is on par with an improving labor market.
Consumer Price Index
What It Measures: The price level of a fixed market basket of goods and services purchased by consumers. CPI is the most popular inflation indicator, so this is a very important report that can move the market.
The Breakdown: In January, the Consumer Price Index fell 0.7%, in line with economists’ estimates. Energy prices fell 9.7%, with gasoline prices plunged 18.7%. Excluding food and energy prices, the core CPI increased 0.2% in January, above economists’ estimates of 0.0%. Meanwhile, the December CPI was revised to a 0.3% drop, less than the 0.4% decline previously reported.
The Bottom Line: This is the third-consecutive month that headline consumer prices have fallen. In the past 12 months, the CPI has dipped 0.1%. However, much of this stems from oil prices, which are at a multi-year low. Core consumer prices have actually risen 1.6% in the past year, suggesting that inflation may be starting to brew.
Durable Goods Orders
What It Measures: Orders are a leading indicator of manufacturing activity. So, every month the Census Bureau and the Department of Commerce 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 January, orders for durable goods surged 2.8%. Economists were expecting a 1.0% decline in orders, so this was much stronger than expected. A 129% surge in commercial aircraft orders offset a 2.9% decline in the auto industry. Excluding both aircraft and autos, durable goods orders rose 0.3% in January, also above the 0.1% consensus estimate.
The Bottom Line: This represents the largest monthly gain in six months, and was a refreshing change from the lackluster December report. Especially encouraging was that business orders rose 0.6% in January after four straight monthly declines. However, core orders have declined at a 7% annual rate in the past four months, which signals a very cautious business sector. Overall, the January durable goods report was encouraging, but there needs to be similar gains in the upcoming months.
Fourth-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 [February 27] that the U.S. economy grew at a 2.2% annual pace in the fourth quarter. This is lower than the initial estimate of 2.6% growth. Nonetheless, this was still a faster pace than the 2.0% rate predicted by economists. The widening trade gap and tighter business inventories weighed on overall economic growth. At the same time, consumer spending grew 4.2% last quarter, the fastest pace since early 2006.
The Bottom Line: While the economy took a breather in the fourth quarter, economists are expecting more robust growth in the first quarter. One reason is that after keeping a tight lease on their inventories, businesses will need to restock their shelves in the coming months. Meanwhile, persistently low oil prices has helped to boost consumer spending, and I don’t see this trend reversing any time soon.
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 it is important to keep track of both reports.
The Breakdown: The University of Michigan’s Consumer Sentiment Index finished the month of February at a 95.4 reading. Economists were expecting a 93.6 reading, so this was stronger than expected. However, this is a drop from last month’s rating of 98.1, an 11-year high, and harsh winter conditions are partially to blame.
The Bottom Line: Despite the month-to-month decline, by this measure U.S. consumer sentiment is now at its highest level in eight years. It appears that this drop is mainly due to the harsh seasonal weather experienced in the Northeast and Midwest. The report stated that Southern states were more optimistic. So, consumer confidence should pick back up in the spring.
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.
