Markets lost ground again last week after Greece technically defaulted on loan payments and edged closer to an exit from the Euro. For the week, the S&P 500 dropped 1.29%, the Dow lost 1.24%, and the NASDAQ fell 1.92%.
What contributed to market performance last quarter?
Ongoing issues in Greece occupied a lot of headlines last quarter. Greece, which has struggled with debt and recession for years, has been in a standoff with its European creditors for weeks with no resolution in sight. U.S. investors responded to the turmoil with nervousness, worried about the possibility of financial contagion spreading from Europe to the U.S. Though Greece has technically defaulted on its debt obligations, we believe that financial markets are prepared for additional Greek drama and reactions will hopefully be short-lived.
Continued improvement in the labor market was a source of more positive investor sentiment last quarter. The June jobs report showed that the unemployment rate declined again to 5.3% and that the economy added 223,000 new jobs last month, bringing the total number of jobs created in the first half of the year to just over 1 million.
While the labor market is clearly making strides, it’s becoming clear that this is not your father’s recovery. Many available jobs are part-time only, wages are sluggish, and the workforce is smaller than it used to be, partly because of the vast numbers of Boomers heading into retirement.
On the positive side, the tepid report probably doesn’t give Fed chair Janet Yellen the “decisive evidence” of a jobs recovery she says she wants to see before raising interest rates this year. The Fed spent most of the first half of 2015 emphasizing that it’s going to eventually have to raise interest rates to fight off inflation. Fortunately, Fed statements have repeatedly stressed the central bank’s intention to take a slow, cautious approach to rate hikes. Will we see a rate increase this year? Possibly. Most Wall Street experts seem to think that a September hike is in store.
What can we expect in the weeks ahead?
Greece will be on investors’ minds in the coming weeks as European leaders seek a resolution to the debt-ridden country’s financial crisis. However, some analysts don’t believe that a default will necessarily lead to an exit from the Euro. However the situation is resolved, we don’t expect U.S. financial markets to experience more than a short-term pullback; in fact, stocks might head higher due to a ‘flight to quality’ effect as investors seek alternatives outside of Europe.
Investors will also be eagerly waiting for the first estimate of last quarter’s economic growth. After the dismal first quarter, in which economic growth ground to a halt, investors have pinned their hopes on a second quarter resurgence. Estimates of Q2 Gross Domestic Product growth are ranging between 2.0%-3.3%, showing that there are a lot of opinions out there on how the economy is doing.
What will earnings season bring?
By the trickle of earnings that we’ve seen so far, we can see that investors are being very unforgiving of low performers. Their attitude makes sense in light of how high markets have been running. Going forward, we want you to keep a couple of things in mind:
- Many of the challenges facing U.S. companies in the first quarter are still present. Slow demand, a strong dollar, lagging oil prices, and confusion in Europe may all drag on earnings and revenue.
- The Energy sector, which pushed aggregate earnings down, is still expected to under perform. Excluding energy companies, overall S&P 500 earnings are projected to be flat. So, the good news is that many U.S. companies are holding their own in a challenging environment.
Could we see a pullback in the days and weeks ahead? Possibly. Is it the end of the world? Absolutely not. While it’s impossible to predict how markets are going to react to earnings season, Greece, or any other potential headwind, we want to emphasize that market corrections are a natural and expected phenomenon in today’s world; while it’s stressful to watch portfolio values fluctuate, pullbacks offer a good opportunity to review strategies and think about your personal goals. We also specialize in creating strategies that help mitigate volatility and work to take advantage of market movements.
Monday: ISM Non-Mfg. Index
Tuesday: International Trade, JOLTS
Wednesday: EIA Petroleum Status Report, FOMC Minutes
Thursday: Jobless Claims
Friday: Janet Yellen Speaks 12:00 PM ET
Greeks vote “No” on bailout. Greek voters rejected the historic bailout referendum, refusing to given in to pressure to accept further austerity cuts. The result paves the way for negotiators to try and get a better deal from European creditors.
[x] China slips into bear market. The Shanghai Composite Index closed over 20% lower than its June 12 high, officially putting Chinese stocks in a bear market. Some analysts believe that China’s correction is unremarkable given the country’s economic struggles.
Pending home sales reach multi-year high. The number of houses under contract rose to the highest level in over nine years in May, indicating that homebuyers may be taking advantage of a reprieve on higher interest rates.
Consumer confidence rises more than expected in June. A gauge of how optimistic Americans feel about their economic prospects soared last month, stoking hopes that spending may boost economic growth.
Markets lost ground last week, giving in to nerves about Greece and some early second-quarter earnings reports. For the week, the S&P 500 dropped 0.40%, the Dow fell 0.37%, and the NASDAQ lost 0.71%.
Crumbling Greek debt talks were in focus again last week as the deadline toward the June 30 expiration of Athens’ bailout program edges closer. Though Greek leaders asked for a one-month extension of the bailout, creditors rejected the request, pushing the stakes much higher for Greeks.
The threat of a liquidity crisis – inevitable if Greece is ejected from the Eurozone – sent Greeks scrambling to withdraw funds from bank accounts. Sources say that over one-third of ATMs in the country ran out of cash. Though Greek banks are dealing with record withdrawals, the European Central Bank announced Sunday that it will cap emergency support for banks at current levels, leaving their cash reserves seriously depleted. If Greek leaders lock down access to accounts, ordinary Greeks could suddenly find the euros in their accounts converted to another currency if Greece exits, seriously complicating their ability to buy goods and services until the financial system recovers.
While a crisis is already underway in Greece, it’s very unlikely that serious issues will make their way to U.S. shores. Why? As the chief economist of First Trust puts it, “Greece is Detroit, Not Lehman.” In terms of international impact, a Greek default will look more like Detroit’s bankruptcy than the collapse of Lehman Brothers in 2008. Lehman Brothers played a significant role in financial markets and its sudden collapse shocked the world, helping to trigger the financial crisis.
In contrast, Greece’s contribution to the world economy is miniscule, and the country’s financial problems have been going on for years. While there is no way to know for sure how a Greek exit will affect financial markets, we believe that markets and economies worldwide are already prepared for the eventuality. Though we may see short-term volatility and a possible market retreat, we believe that many fears are overblown.
Looking ahead, Thursday’s June jobs report will be the highlight of the Independence Day shortened week. Investors will be weighing the latest job market data to predict how soon the Fed may raise rates. Markets will also be looking toward Greece as the bailout deal nears expiration on Wednesday.
Monday: Pending Home Sales Index, Dallas Fed Mfg. Survey
Tuesday: S&P Case-Shiller HPI, Chicago PMI, Consumer Confidence
Wednesday: Motor Vehicle Sales, ADP Employment Report, PMI Manufacturing Index,
ISM Mfg. Index, Construction Spending, EIA Petroleum Status Report
Thursday: Employment Situation, Jobless Claims, Factory Orders
Friday: U.S. Markets Closed For Independence Day Holiday
U.S. economy contracted in Q1. The latest government data shows that Real Gross Domestic Product growth, the leading indicator of U.S. economic activity, contracted by 0.2% in the first quarter of 2015.
Consumer spending surges in May. Spending by American consumers recorded its biggest gain in nearly six years. Consumer spending rose 0.9% on strong demand for big-ticket items like automobiles.
China lowers interest rates again. In an effort to boost their sluggish economy, Chinese central bankers lowered interest rates for the fourth time and eased lending rules for small businesses.
Factory growth drops. Growth in manufacturing activity in U.S. factories slipped in June for the third month in a row, dropping to the lowest level since October 2013. The data could suggest that the economy didn’t rebound as much as expected in the second quarter.
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]
Despite flirting with new records, markets weren’t able to hold on to gains last week and closed mixed after comments about interest rates were made by Federal Reserve Chair Janet Yellen. For the week, the S&P 500 gained 0.16%, the Dow lost 0.22%, and the NASDAQ gained 0.81%.
Yellen gave a speech Friday that underlined her determination to raise interest rates this year as long as the economic recovery continues. Though she didn’t really say anything new, her comments underscore the fact that the Fed is committed to returning to normal monetary policy as soon as economists feel the economy can handle it. She also emphasized that interest rate hikes will be done gradually over a period of years, which should help cushion the blow to financial markets.
Could Yellen have been floating the idea to see how markets will react to a more aggressive stance on interest rates? Possibly. If so, the next few weeks could give us an idea of how investors will treat the news. Her speech also highlights her optimism about economic growth despite some weak reports in recent weeks.
Last week’s jobs report showed that the number of Americans filing new claims for unemployment benefits rose slightly to 274,000. However, the four-week moving average, a less volatile indicator, fell to the lowest level since April 2000. Outside of the energy sector, which has lost thousands of jobs due to low oil prices, layoffs in the U.S. have been minimal in the past months.
Though jobless claims (a good indicator of layoffs) rose slightly, claims from Americans renewing unemployment applications fell to the lowest level since November 2000. Currently, the overall trend is one of steady improvement in the labor market, which we hope will translate into higher consumer confidence and spending this summer.
Core inflation data also supports a move to higher interest rates later this year. The Fed has the “dual mandate” of keeping unemployment low and inflation stable and had tied monetary policy changes to two numbers: a headline unemployment rate of 5.2-5.6% and annual inflation of 2.0%. While the employment goal has been reached, the inflation target has been more elusive.
While some economists have worried about too-low inflation, the latest Consumer Price Index (CPI) figures suggest that core CPI, the number most used by economists, rose 1.8% in the last year. This stable rise, just under the Fed’s target, indicates that price pressures remain stable but are moving higher and closer to the 2.0% goal.
Looking ahead, analysts will be closely watching Friday’s second reading of the Q1 Gross Domestic Product (GDP) report. Unfortunately, the news isn’t expected to be good, and many economists expect to see that the economy shrank amid harsh winter weather and dock strikes. However, there’s considerable hope that the economy is rebounding in the second quarter (much as it did last year).
Monday: U.S. Markets Closed For Memorial Day Holiday
Tuesday: Durable Goods Orders, S&P Case-Shiller HPI, New Home Sales, Consumer Confidence, Dallas Fed Mfg. Survey
Thursday: Jobless Claims, Pending Home Sales Index, EIA Petroleum Status Report
Friday: GDP, Chicago PMI, Consumer Sentiment
Factory growth slows for second month. Growth in the U.S. manufacturing sector, a major driver of economic activity, slowed down for another month in May. New orders increased at a very slow pace, indicating that next month might be slow as well.
U.S. gas prices at six-year low. Just in time for the summer driving season, pump prices across the nation are at a multi-year low. According to AAA, average gas prices were just $2.74 across the country. Hopefully, fuel savings will result in greater consumer spending.
Greece can’t pay its June bills. Greek leaders announced that they won’t be able to make debt repayments next month unless they receive another round of rescue funding. Despite months of negotiation, it’s unclear whether a deal can be reached that would prevent Greek insolvency.
April housing starts surge. Groundbreaking and permits for new homes spiked in April to the highest level in over seven years, indicating that homebuilders were confident about future sales. March numbers were also revised upward in a very hopeful sign for the housing market.
Months of tepid economic data and flirtation with higher interest rates lead many to ask:
What’s going on with the economy, and how will it affect the Federal Reserve’s interest rate decision?
The Fed, which has kept interest rates low to help the economy out of the 2008 financial crisis, needs to start returning to “normal” monetary policy to keep inflation in check and to prevent too-low interest rates from spurring another asset bubble. However, raising rates too soon could derail the economic recovery, so the Fed is being quite cautious.
The Fed has emphasized flexibility in its approach to raising rates, which doesn’t give us much of an idea of when they will raise rates. Right now, the consensus among economists is that the first rate hike will come in September, though it’s not at all certain.
Let’s take a look at a couple of major indicators that give us a brief snapshot of the economy right now:
The latest jobs data shows that the labor market is improving. The economy added 223,000 new jobs in April, and the number of underemployed Americans is dropping. Another recent report shows that the number of workers voluntarily quitting their jobs has hit its highest point since 2008 as Americans gain confidence in new opportunities.
In the first quarter, economic growth flat lined, increasing just 0.2%, due to a combination of factors. However, many economists expect the economy to shake off some of its headwinds and pick up this quarter.
Corporate profits in the first quarter were up a respectable 2.4% for S&P 500 companies (as of May 15, 2015), though revenues were down 3.7%. However, companies have all lowered their expectations for the second quarter, indicating that they’re still worried about domestic and global demand.
All of these indicators paint a picture of an economy that’s still chugging along without showing the breakout growth we had hoped for this year. Though a recession doesn’t seem likely, there are a number of global headwinds that may continue to dog the economy: volatile oil prices, a Chinese slowdown, and tepid consumer spending.
What would the Fed like to see before raising rates?
Recent statements from the Fed indicate that it is still in wait-and-see mode. Waiting to see what? A solid, sustainable turnaround in economic growth that’s supported by the labor market. The deceleration of economic growth in the first quarter and a lack of wage growth gave the Fed pause for thought, and economists will want to see sustainable improvements in indicators like durable goods orders, business investment, and GDP growth before making their next policy move.
What does this mean for investors?
Bottom line: We can expect markets to remain choppy as investors take stock of current conditions and try to determine where markets are going. Overall, we’re cautiously optimistic about market performance. However, we recognize that persistent market highs in the face of mediocre data could set the stage for a short-term pullback. As always, we’re keeping an eye on conditions and will let you know when anything changes.
Monday: Housing Market Index
Tuesday: Housing Starts
Wednesday: EIA Petroleum Status Report, FOMC Minutes
Thursday: Jobless Claims, Philadelphia Fed Business Outlook Survey, Existing Home Sales
Friday: Consumer Price Index, PMI Manufacturing Index Flash, Janet Yellen Speaks 1:00 PM ET
Weekly unemployment claims fall unexpectedly. The most recent weekly jobs report showed that layoffs are dropping and new unemployment claims are close to the 15-year lows reached several weeks ago.
Retail sales unchanged from March. Though March numbers were revised upward, April retail sales data was flat as Americans cut back on big-ticket purchases like televisions and autos. Economists had hoped that Americans would spend – rather than save – the money they pocketed from cheaper gasoline.
China is America’s largest creditor (again). Though central banks around the world have decreased their holdings of U.S. Treasuries, China’s central bank is back on top with $1.261 trillion. Central banks hold foreign currency reserves mainly to cushion currency exchange rate shocks and keep rates steady.
Mortgage applications fall as rates rise. A sharp rise in interest rates last week caused a drop in mortgage applications for both buyers and refinancers. Though mortgage volume is still up 14% from the same time last year, volume is shrinking as homebuyers balk at higher rates.
Markets fell last week as investors digested lukewarm economic data and considered future economic growth prospects. However, stocks bounced back on Friday and trimmed their losses. For the week, the S&P 500 lost 0.44%, the Dow slid 0.31%, and the NASDAQ dropped 1.70%.1
Last week, investors got their first look at Q1 economic growth. The advance estimate of Gross Domestic Product showed that the economy basically ground to a halt in the first quarter, growing just 0.2%. Though this early report is based on incomplete data, the picture so far shows that exports plunged, businesses slashed spending, and consumers kept their pocketbooks closed.2
While some of the weakness is due to a cold winter and a West Coast port strike, the effects of a strong dollar and weak global demand may linger into the second quarter. So far, we know that consumer spending edged upward in March and that wages increased in the first quarter, giving Americans more money to spend.3
The Federal Reserve’s policy-setting Open Market Committee also met last week to take stock of the economy and discuss future interest rate policy. As expected, the central bank made no moves to raise rates and emphasized that any future rate hikes will be based on a careful analysis of the economic environment. Bottom line: It’s unlikely that rate hikes will come before the fall.4
Can markets sustain the rally amid sputtering economic growth? We can’t know for sure, but we are keeping a close eye on factors like business investment, corporate expectations, and future economic growth projections to guide our decision-making process. While fundamentals show that the economy is still growing, obstacles like weak business investment, cautious spending, and global growth concerns may lead to a market pullback in the coming weeks and months.
Since the bottom of the last bear market in 2009, the S&P 500 has returned over 200%.5 Though we’ve had some bumps in the road, we haven’t experienced a serious 10%+ correction since 2011.6 Some analysts believe that we are overdue for pullback while others have a brighter outlook on market performance.7 Since history never repeats itself exactly, we don’t believe it’s useful to worry about what might be around the corner. Instead, we focus on creating personalized strategies that pursue our clients’ goals and then make prudent adjustments as conditions warrant.
Monday: Factory Orders
Tuesday: International Trade, ISM Non-Mfg. Index
Wednesday: ADP Employment Report, Productivity and Costs, Janet Yellen Speaks
9:15 AM ET, EIA Petroleum Status Report
Thursday: Jobless Claims
Friday: Employment Situation
Weekly jobless claims plummet. The number of Americans filing new claims for unemployment benefits, an indicator of layoffs, fell to the lowest level since 2000. These numbers suggest that the weak March jobs report was a seasonal aberration.8
April consumer sentiment at 2nd highest level since 2007. A monthly indicator of consumer sentiment rose last month as Americans became more optimistic about current and future conditions. Though consumers are worried about interest rates, they are more confident about jobs and income prospects.9
Motor vehicle sales driven by trucks and SUVs. Cheap gas appears to have reignited Americans’ love affair with big vehicles; though April is typically a slow month for auto sales, demand for sport-utilities and trucks accounted for about half of April’s sales.10
Manufacturing growth slows in April. Though the manufacturing sector is growing, the pace of growth fell last month to the slowest pace in almost two years. Though new orders are up (a good sign for future growth), employment is down to its lowest level in five years.11
Markets rallied last week, lead by a surge in tech stocks that brought the NASDAQ and S&P 500 to new record closes. For the week, the S&P 500 gained 1.75%, the Dow grew 1.42%, and the NASDAQ added 3.25%.1
After weeks of uncertainty, markets shook off the doldrums and rallied on the back of earnings beats from market heavyweights. Without any major economic events having occurred last week, market performance was driven by reactions to the earnings reports of a few key players.2
Have earnings reports justified the stock market’s reaction? Not really. Right now, it seems as though expectations going into earnings season were so low that any positive news was greeted with cheers. While total profits for 202 S&P 500 companies were up 8.7% over first quarter 2014, revenues were essentially flat. Weak revenue numbers indicate that companies struggled with slow demand last quarter and achieved profitability through cost-cutting measures. Looking ahead at the rest of earnings season, some analysts project that overall earnings for S&P 500 companies will be flat on 5.1% lower revenues.3 Worse, currency headwinds from a strong dollar and global economic issues may affect demand in the second quarter as well.
The week ahead is packed with important economic events: a Federal Reserve Open Market Committee meeting, the first estimate of Q1 economic growth, and a raft of company earnings reports. No interest rate changes are expected at the Fed’s policy-setting meeting, but officials may clarify their thoughts on first quarter economic performance.
Right now, the future timing of rate changes is anyone’s guess. Economists are focusing on determining how much of weak first quarter data is weather related and how much was due to lingering economic forces like a strong dollar and soft global growth. Though a June rate hike isn’t off the table, some Fed officials are hinting that higher interest rates might come later in the year.4 With respect to markets, we can expect further volatility as investors digest earnings reports and economic data.
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Monday: Dallas Fed Mfg. Survey
Tuesday: S&P Case-Shiller HPI, Consumer Confidence
Wednesday: GDP, Pending Home Sales Index, EIA Petroleum Status Report, FOMC Meeting Announcement, 2:00 PM ET
Thursday: Jobless Claims, Personal Income and Outlays, Employment Cost Index, Chicago PMI
Friday: Motor Vehicle Sales, PMI Manufacturing Index, ISM Mfg. Index, Consumer Sentiment, Construction Spending
Weekly jobless claims rise for third straight week. Though the number of Americans claiming new unemployment benefits rose again last week, the underlying trend shows that the labor market is improving. Seasonal issues like school breaks and Easter holidays tend to make numbers more volatile this time of year.5
Tight housing supply holding back market. A limited number of homes for sale is keeping back a spring surge in the housing market. Nearly three-quarters of the available homes for sale are “stale” and have sat on the market for more than a month with little buyer interest. High prices may be turning off prospective buyers.6
No Greek deal in sight. As the deadline to a Greek debt bailout edges closer, no permanent solution is emerging. Greece is having trouble repaying loans to Eurozone creditors, and lenders warned Friday that no fresh aid will come unless the cash-strapped nation agrees to serious economic reforms.7
Oil prices diverge. Though U.S. crude oil prices fell on worries of another production glut, international Brent crude prices rose to 2015 highs as fighting in Yemen threatened supplies. This push-pull in prices makes it hard for analysts to predict the direction of prices.8