U.S. markets ended the week on a down note as investors struggled with weak economic data and concerns about Greek debt negotiations. However, markets were able to end the month of May in the black. For the week, the S&P 500 lost 0.88%, the Dow dropped 1.34%, and the NASDAQ fell 0.38%.[i]
On Friday, we got a look at revised first-quarter gross domestic product (GDP) growth numbers, and we found out that the economy actually shrank 0.7 percent last quarter instead of growing.[ii] The news wasn’t unexpected, as economists knew that the economy struggled with issues like a harsh winter, a port shutdown, and a strong dollar that ate away at U.S. exports. However, it’s unwelcome because it means that the economy still hasn’t reached escape velocity and the recovery may still be fragile.
Though we don’t have data on the spring quarter yet, many economists expect a significant rebound in economic growth. We’ve seen estimates ranging from 1.0 percent to 3.2 percent, so it’s clear that there’s a lot of room for debate.[iii] Markets also took a hit from stalled Greek debt negotiations. Greece is currently deadlocked in talks with creditors for a new round of loans needed to service its debt and make government payments. To give you a brief bit of history: Greece was at the center of the European debt crisis after financial markets imploded in 2008.[iv]
To ward off a sovereign debt default, which might have touched off another European crisis, Greece accepted loans from European and international lenders in 2010. In exchange for the money, Greece agreed to institute austerity measures, massive cuts to government spending, designed to bring the national debt under control.
However, the cuts were deeply unpopular with Greek citizens, and a new leftwing Greek government elected in January rose to power on a wave of anger at the effects of austerity – rampant unemployment, brain drain, and low economic growth.[v]
What’s the big deal now? New Greek leaders refuse to reinstate austerity measures, and their creditors don’t want to extend more loans unless they meet their economic terms. If Greece doesn’t get another infusion of cash by its next debt deadline on June 5, the country will default on debt payments, which may trigger a banking crisis and possible exit from the European Union.[vi] Though the long-term effects of a “Grexit” (Greek exit) can’t be predicted, investors are likely to worry that where Greece goes, other countries may follow.
If Greece fails to reach an 11th-hour deal with its creditors this week, it’s likely that European and U.S. markets would react badly to the news. Let’s hope that this latest round of brinksmanship can be resolved; as always, we’ll keep you informed. The week ahead is also filled with domestic economic data, including the May employment report, which investors hope will show that the labor market continued its upward trend after a March blip.
Monday: Personal Income and Outlays, PMI Manufacturing Index, ISM Mfg. Index, Construction Spending
Tuesday: Motor Vehicle Sales, Factory Orders
Wednesday: ADP Employment Report, International Trade, ISM Non-Mfg. Index, EIA Petroleum Status Report, Beige Book
Thursday: Jobless Claims, Productivity and Costs
Friday: Employment Situation
Consumer sentiment beats expectations though still weak. U.S. consumers remain cautious about the current state of the economy, leading some analysts to worry about consumer spending this quarter.[vii]
Durable goods orders fall. Orders for long-lasting factory goods fell in April, but the underlying data indicates that business spending is slowly picking up. Excluding volatile transportation orders, orders climbed 0.5%.[viii]
New home sales rise more than expected in April. Sales of newly constructed single-family homes surged in April, indicating that a housing sector resurgence may be underway. Hopefully, the strengthening job market will support sales activity.[ix]
Pending home sales looking up. A forward-looking indicator of U.S. home purchases rose in April for the fourth straight month in a very positive sign for the housing sector. The gauge rose 14% over April 2014, the highest level since May 2006.[x]