To say the least, last week was a disappointing week on Wall Street. Between mixed economic data, declining factory production in China, airstrikes in Yemen and fluctuating oil prices, the S&P 500 posted yet another weekly loss. Both the S&P 500 and Dow Jones Industrial Average slipped more than 2% this week.
As I have mentioned, much of the stock market’s decline this week can be attributed to profit-taking. Many investors were booking gains in the red-hot biotech and technology sectors this week, which is why some of our tech and biotech stocks like Super Micro Computer, Inc. (NASDAQ:SMCI) and Depomed Inc (NASDAQ:DEPO) pulled back last week, too.
Of course, the big headline at the end of last week that hit the stock market early was news that Saudi Arabia and its regional allies launched airstrikes around Yemen’s capital city, Sanaa. The city and government were taken over last fall by Houthi militants, and Yemen’s president asked Saudi Arabia to help restore the former government to power.
The move shocked Wall Street, and investors’ nerves got the better of them.
It’s never easy to watch the stock market decline and pull our stocks down with it. But keep in mind, sometimes heading into an earnings season, Wall Street likes to beat up the stocks that have been strong; just like what we saw with the biotech and tech stocks last week. Yet, when earnings are revealed next month, they’re going to be phenomenal.
We also need to remember that money is not going to leave this market. The S&P 500 dividend yields 2%, which is higher than a bank. Investors don’t want to move to cash, because the stock market offers more than the alternative. So, the money is going to stay in the market; it’s just going to slosh around.
As a result, market volatility isn’t going away any time soon, and in the coming weeks, earnings announcement season is going to play a huge role in the market’s day-to-day swings. That’s why we’ve been structuring my portfolio with only stocks that have robust earnings and sales growth, as well as a few with nice dividend yields. This ensures that when the market seesaws, we have stocks that will balance out this volatility.
So, overall, there is no reason to panic. We are, as I like to say, “locked and loaded” heading into first-quarter earnings announcement season — and well positioned to endure the markets ups and downs. Here are seven other reasons to stay calm in the current climate:
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 climbed 1.2% in February to a seasonally adjusted 4.88 million pace. This was slightly below economists’ expectations for 4.92 million. At the current sales pace, it would take 4.6 months to sell all of the homes currently on the market. Housing inventory increased 1.6% in February to 1.89 million existing homes.
The Bottom Line: After sales of existing homes fell in January, it is a positive sign that more homes were sold last month. Compared to a year ago, existing home sales were up 4.7% in February. And as weather warms up, we’ll likely see sales creep higher.
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: The Labor Department reported that the CPI increased 0.2% in February, breaking a three-month streak of declines. This was right in line with economists’ expectations. Excluding food and energy prices, core CPI climbed 1.7% compared to the prior year.
The Bottom Line: The tick higher in the CPI last month can be attributed mainly to the 1% rise in gasoline prices in February. Oil prices still remain significantly lower than last year — and the strength of the U.S. dollar and falling oil prices will likely continue to weigh on the CPI in the coming months.
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 February, sales of new homes increased 7.8% to a seasonally adjusted annual rate of 539,000. That walloped economists’ projections for an annual rate of 470,000. January’s new home sales were also revised higher to 500,000, up from 481,000.
The Bottom Line: This marked the highest level of new homes sales since February 2008 — and it was also the first back-to-back months of gains above 500,000 since April-May 2008. So, despite the cold winter months in much of the U.S., buyers were not deterred.
Durable Goods Orders
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 February, orders for durable goods declined 1.4%, which missed economists’ projections for a small increase. Excluding the transportation sector, durable goods orders slipped 0.4%. January orders were revised lower to 2%, down from a 2.8% increase.
The Bottom Line: This was the third decline in durable goods orders in four months, and implies that many companies are cautious given the slowing global economy. As a result, some economists have lowered their GDP forecasts for the first 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. 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 March 21, initial claims for unemployment fell to a seasonally adjusted 282,000 rate, which was better than economists’ expectations for 290,000. The four-week moving average slipped to 297,000.
The Bottom Line: Jobless claims are now at their lowest level since mid-February, signaling that the U.S. labor market continues to improve.
Fourth-Quarter GDP (Third 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 U.S. economy grew at a 2.2% annual pace in the fourth quarter, according to the third estimate issued by the Bureau of Economic Analysis. Economists expected the growth rate to be revised up to 2.4%, while the government estimated a 2.6% growth rate back in January. Consumer spending grew 4.4% last quarter, outperforming previous estimates of 4.2%. Exports were also more robust, increasing to 4.5%, compared to the 3.2% previously reported.
The Bottom Line: While the economy did take a breather in the fourth quarter, the overall pace is still much healthier than what is expected to be reported for the current quarter. A harsh winter combined with weaker-than-expected economic data recently will impact the first quarter more than previously expected.
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 March at a 93.0 reading. Economists were expecting a 91.0 reading, so this was stronger than expected. However, this is a drop from last month’s rating of 95.4, and harsh winter conditions are partially to blame for the pullback.
The Bottom Line: A rough winter and a slight oil rebound in March caused consumer confidence to edge lower, with lower income households being impacted the most. However, the report stated that consumer sentiment overall has been mostly positive, and it reach a 10-year high at 95.5 in the first quarter.
Louis Navellier is the editor of Blue Chip Growth.