U.S. stocks continue a surging march forward as the economy appears to be setting up for a big move. The question many analysts are still pondering over is whether the move may head downward before reversing back up. The week’s economic calendar saw a flood of economic data that could support either directional theory, including a weak first-quarter GDP report indicating the economy shrank at a 1% annual rate for the first time since 2011. What normally would be considered drastic market moving news is being shrugged off by investors as a fluke. Ben Leubsdorf of the Wall Street Journal has more on weather driven contraction;
“Severe weather conditions had a deeper impact on first quarter economic activity than previously estimate. Much of the weakness will likely result in pent-up demand and should reverse in the second quarter. Government economists had previously estimated GDP slowed to a 0.1% growth rate in the first quarter as harsh winter weather disrupted work sites, curtailed foot traffic at retail stores and snarled transportation networks across much of the U.S.”
“The three-month contraction isn’t expected to herald a prolonged downturn, though it’s rare for the economy to shrink outside of a recession. Even if it is temporary, the downturn reflects a pattern seen repeatedly over the past five years. The worst recession since the Great Depression ended in June 2009, but the economic recovery has struggled to gain traction. Job growth has been largely lackluster even as the unemployment rate has slowly fallen. Sluggish wage growth has restrained consumer spending. The housing market surged in 2012 and into 2013, but has slowed over the past year as mortgage rates have climbed and prices have surged.”
“Many economists had hoped 2014 would be a breakout year for growth, encouraged by an economy that grew at a 3.4% pace in the second half of 2013. Those hopes have been deferred – if not yet dashed – by the latest stretch of weakness.”
Part of the theory behind this sluggish growth has been attributed to the slow deleveraging process post-credit crisis and certain political roadbloacks. These roadblocks include regulatory business challenges sestemic from Dodd-Frank, the Afforable Care Act, and pronounced government spending cuts. Despite these theories, there is a certainty that poor weather conditions played an immense roll in first-quarter weakness affecting sectors from housing to consumer spending. If weather was a main depressant in the first-quarter, then 2014 should seem brighter with surges in investory, construction, and employment.
Is the GDP report a sign of further sluggishness or a temporary pause before an economic surge? Tell us what you think. Email us at iInvest@chesapeakeinvestment.com
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U.S. stocks continued their advance as data came in indicating strength in manufacturing while jobless claims rose more than forecast. The PMI manufacturing index highlighted continued strength as weather woes subside completely and solid month-to-month performance remains consistent. Gains in existing homes sales also lifted market prospects while jobless claims rose more than expected. The uneven progress in the labor market comes as continuing claims fall to their lowest level since 2007. Shobhana Chandra of Bloomberg has more on the recent market movers;
“The Markit Economics preliminary index of U.S. manufacturing increased to 56.2 in May from 55.4 a month earlier as output accelerates. Readings above 50 for the purchasing managers’ measure indicate expansion and the May figure was the highest in three months. A preliminary purchasing managers’ index in China increased to a five-month high.”
“Other data showed sales of previously owned U.S. homes rose in April for the first time in four months as the weather warmed, price increases slowed and more properties were put on the market. More Americans than projected filed applications for unemployment benefits last week, showing uneven progress in the labor market.”
“The U.S. stock market is trading in the tightest range in eight years. In the last three months, the difference between the S&P 500’s intraday high and low has been less than 5 percent.”
This tight movement might reflect how concerned market participants are over the fragile state of the global economy at the moment. This concern apparently is shared by cautious consumer in which American’s expectations for the economy have drifted to a seven-month low, a recent gage indicated. The Federal Reserve however is more optimistic according to the most recently released minutes, which illustrate the economy is on a steady path for economic normalization. A path that will have the tapering process concluded before the end of 2014 with a raise in interest rates projected for mid-2015. The U.S economy finds itself in a precarious and unique position in time, where Quantitative Easing is being tapered back domestically while its implementation is being considered in the EU. It is a situation that finds global instability occurring in Eastern Europe and Thailand. Such a situation requires delicate care so that recent record highs in the major indices will not give way to the often prophesized but yet to transpire 10 percent correction.
As the U.S. Federal Reserve slowly winds down its unprecedented economic stimulus plan, the ECB prepares to ramp up its own tailored measures in an effort to combat weak inflation and lackluster output. Last week ECB President Mario Draghi signaled that the counsel was ready to begin the process in June. As an affirmation, the Bundesbank, Germany’s central bank, also signaled that they were finally ready for the implementation of possible measures. An attempt to prop up the euro zone is a response to the record-long recession that is still disproportionately affecting certain member countries and has resulted in staggering unemployment levels for Europeans youth. Stefan Riecher of Bloomberg has more on the current state of the European Union;
“The euro-area recovery failed to gather momentum last quarter, as France unexpectedly stalled and economies from Italy to the Netherlands shrank. Growth of just 0.2% for the currency bloc, half as much as economists had forecast, adds pressure on the European Central Bank to deliver stimulus measures next month.”
“While German expansion doubled to 0.8%, that wasn’t enough to offset renewed weakness across the region. The Bundesbank has warned that while the economy shows an upward trend, growth will slow “noticeably” in the three months through June. The euro-area recovery is proceeding at a slow pace and it still remains fairly modest. There is consensus about being dissatisfied with the projected path of inflation.”
“Should the ECB decide to act, it might deploy multiple tools rather than just reducing borrowing costs. Options include offering more long-term loans to banks or halting the sterilization of liquidity from crisis-era bond purchases under the Securities Markets Program”.
While French and Dutch economic figures indicate a contraction, Germany remains the key to expansion as growth is driven by private consumption and improved construction spending. The growth in Germany and its departure from other struggling EU states is further reflected in the DAX stock index, which is close to trading at record highs, indicating a confidence in economic performance. However if the 18-member euro block is to fully recover, one or two nations cannot advance alone without a unified effort to boost inflation expectations, lower unemployment rates, and renew incentives for investment. Europe is only as stung as its weakest part and those parts for the moment are only getting weaker.
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