Daily Market Commentary

Week In Review: Stocks End Month Higher; Week Lower

Stocks End Month Higher; Week Lower

The Dow Jones Industrial Average, the benchmark S&P 500, small-cap Russell 2000, and Nasdaq composite all fell last week but rallied for the month. The latest reading on U.S. Q1 GDP fell 0.7%, beating the government’s estimate for a decline of 0.8%. Economists now believe that Q2 GDP will grow around 2% which means the U.S. economy is poised for its worst first-half performance since 2011…WITH RATES AT ZERO. The Fed has told us that they remain data-dependent and that we should continue to interpret incoming data for signs of what they will do next. At this point, the “data” clearly suggests that a rate hike is off the table until the “data” improves markedly. In fact, I would argue that the Fed will likely CUT rates/ announce QE 4, because that is what the “data” is suggesting right now. The option to raise rates is off the table for now, because if the economy can’t grow when rates are at zero – what will happen if they raise rates? Looking at the market, it is disconcerting to see the transports continue to act so weak which bodes poorly for both Main St & Wall St. We’ll see how this plays out but this is definitely front and center on our radar and not a “bullish” sign. The “good” news is that the major averages are all trading a few percentage points below their 2015 and/or record highs. For now, that is bullish as all of the pullbacks remain shallow in both size (small % decline) and scope (short in duration). 

Monday-Wednesday’s Action: Economic & Earnings Data Is Not Impressive

Stocks were closed on Monday in observance of the Memorial Day Holiday. Stocks opened lower on Tuesday as investors digested the latest round of tepid economic data and the USD resumed its very strong uptrend. Remember the Fed remains “data-dependent” and so far the data remains lackluster at best which removes pressure for the Fed to raise rates anytime soon. On Tuesday, durable goods fell -0.5% in April which barely beat estimates for a decline of -0.6% but was still in negative territory which is not ideal. The Dallas Fed Manufacturing survey plunged to -20.8, missing estimates for -10.0. Markit’s Flash PMI (Purchasing Managers Index) for the services sector slid for a third straight month in May to 56.4, missing estimates for 56.5. The Richmond Fed Manufacturing Index remained soft, at 1, matching estimates for 1. The Conference Board Consumer Confidence report rose to 95.4 in May, beating estimates for 95.1. We saw some somewhat encouraging news from the housing market. New home sales rose +6.8% in April to a seasonally adjusted annual rate of 517k, beating estimates for 510k. The S&P/Case-Shiller composite index of 20 metropolitan areas rose 5% in March on a year-over-year basis, beating estimates for a +4.7% gain. Stepping back, the bigger problem for the “data-dependent” Fed continues to be the economic “data” continues to be lackluster at best with the Fed keeping rates at 0%. It raises the question, how much worse will it be if the Fed begins to tighten ? Stocks rallied sharply on Wednesday after rumors spread that Greek officials and Eurogroup members have started crafting a staff-level agreement to secure funds to avoid a Grexit (Greece leaving the Eurozone). The rumor was refuted after Bloomberg cited a Eurogroup official as saying the two sides have yet to begin working on a joint statement. Economic data was limited to the weekly MBA Mortgage Index, which fell 1.6% to follow last week’s 1.5% decline.

Thursday-Friday’s Action: Stocks Pullback From 2015 Highs

Stocks slid on Thursday after after the Transports slid to a fresh low for the year and the Greek drama continued. The head of the IMF, Christine Lagarde, told a German newspaper that a Greek exit from the euro zone was possible but, if that occurred, it would probably not destroy the euro currency. She said such a step would “not be a walk in the park” but would “probably not” mean the end of the euro. In other overseas news, Chinese stocks plunged 6.5% on Thursday after tighter margin requirements were cited for the large decline. Even with the decline, the Shanghai Composite is still up a very impressive 40% in 2015. In the U.S., weekly jobless claims came in at 282k, missing estimates for 270k. Pending home sales rose 3.4% in April, the highest in 9 years, and beat estimates for 0.8%. Before Friday’s open the government said U.S. GDP fell -0.7%, beating the government’s estimate for a -0.8% decline but missing economists’ estimates for a decline of 0.1%. The Chicago PMI unexpectedly fell to 46.2 in May, missing estimates for 53.1. Separately, consumer sentiment came in at 90.7 for May, the lowest since November, but beat estimates for 90.3.

Market Outlook: The Central Bank Put Is Alive And Well

Remember, in bull markets surprises happen to the upside. This has been our primary thesis since the end of 2012. We would be remiss not to note that this very strong bull market is aging (celebrated its 6th anniversary in March 2015) and the last two major bull markets ended shortly after their 5th anniversary; 1994-2000 & 2002-Oct 2007). To be clear, the central bank put is very strong and until material damage occurs, the stock market deserves the longer-term bullish benefit of the doubt. As always, keep your losses small and never argue with the tape.

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