U.S. stocks were mixed last week with the S&P 500 slightly negative and the Nasdaq Composite mildly positive. Economic data was light although a notable positive was in the housing sector with housing permits up 7.9%. However, the markets were focused on the conclusion of the FOMC meeting on Wednesday. The U.S. economy has entered another soft patch and investors were hoping for more policy easing to stimulate the economy.
This week we’ll get more housing data with the S&P/Case-Shiller home price index on Tuesday. The chart below shows the seasonally adjusted change in house prices. The last two months have been positive, first back-to-back gains since the spring of 2010.
Friday we’ll get an update on Personal Income & Spending which provides good insight into the health of the consumer. Keep in mind that 70% of our economy is derived from personal consumption so it is important to understand the state of the consumer. Below is a chart of U.S. gas prices over the last 18 months. Falling energy prices are giving consumers a much welcome break from earlier this year.
“Concentrate all your thoughts upon the work at hand. The sun’s rays do not burn until brought to a focus.”
Alexander Graham Bell
In this uncertain world we live in we do find certain result in sport. Fact: this weekend Greece defeated Russia in soccer at the EuroCup. Now for the more uncertain world-what to make of Sunday’s elections in Greece. In its simplest perspective the winners were the pro-austerity, pro-Euro forces. With 30% of the vote the New Democracy party had the most votes and the right to form a coalition government. It is felt that the Euro Countries will push back a deadline for austerity goals and provide funds to Greece this summer. The New Democracy Party will form a Coalition Government with the much smaller party, Pasok.
Complications could arise when the austerity measures become more painful. More rioting and protests can be expected and the opposition led by the Syriza party could push for another election. (Keep in mind that the country has now been in recession for five years).
One encouraging note is the vast majority of Greeks want to stay on the Euro. Many voters voted with the New Democracy party just to support unity with Europe. Many seem willing to undertake some sacrifices to stay part of the Euro.
We would conclude this is good news, but hardly a long term cure. Global economic strength would help greatly.
“Change is not always growth just as movement is not always progress”
Last week the stock markets had their largest weekly gain of the year with the DJIA gaining 3.59% mostly as the result of a 287 point rally last Wednesday. The rally was fueled by investors’ hopes for more central bank stimulus as economic news continues to provide further evidence of a global economic slowdown.
On the positive side, oil prices are closing in on eight month lows (chart below) as crude prices dropped to near $84/barrel on Friday as inventories continue to be elevated.
OPEC meets this week and is expected to maintain production at 3 year highs even though they have admitted that it is more than the markets currently need. Lower oil prices will be a boost for consumer spending and will help to keep inflation numbers in check. The May CPI report is due on Thursday this week and the consensus estimates call for a decline of 0.2%. With economic growth slowing in the U.S., Europe and China inflation should not be an issue for the near term.
“In any contest between power and patience, bet on patience.”
- W.B. Prescott
Markets had their second-worst weekly performance for 2012 as ongoing concerns regarding Europe and China weighed on investors’ confidence. Adding to the gloomy mood was an ugly U.S. jobs report on Friday. Markets are likely oversold at these levels, but history has shown that they could stay at these levels for a while.
European leaders continue to drag their feet as the banking and liquidity concerns in Europe fester. China reported tepid manufacturing data as they continue to grapple with slowing growth. U.S. non-farm payrolls came in at their weakest level since May 2011 as payrolls grew by just 69,000 last month … less than half of what was expected. No doubt, slowing global growth is beginning to impact growth in the United States.
The good news is that the markets have corrected over 10% and that much of the bad news is reflected in today’s prices. Low interest rates, low inflation and declining oil/gas prices should help businesses and consumers to weather the economic storm.
Where are our world leaders? Policy makers need to step-up and provide investors and tax-payers with a bit of certainty. Until then, markets will likely remain in a funk.
Here are the closing index levels and weekly returns from last week:
Dow Jones 30 12,119 – 2.7%
S&P 500 1,278 – 3.0%
Nasdaq 2,747 – 3.2%
MSCI EAFE 1,333 – 1.3%
10-year Treasury 1.47% (ugh!)
“You cannot escape the responsibility of tomorrow by evading it today.”