Has the economy hit a "soft patch"? Or something worse?
With hiring at a crawl, home prices at a low, consumer and business spending slowing, and the stock market logging its sixth straight week of losses, headlines continue to declare doom and gloom. As is frequently the case, all this negative press has caused investor sentiment to swing wildly. The latest American Association of Individual Investors (AAII) survey shows that bearish sentiment jumped 14.2% last week alone. Despite the bearish sentiment though, there are positive markers that bode well for a slow-growth recovery.
While leading economists have trimmed their forecast for 2011 GDP growth to 2.7% from 3% a month ago, they are still predicting stronger growth for the second half of the year. 2.7% isn’t that far off the 2.9% growth we saw in 2010. Additionally, manufacturing continues to expand and the ISM Non-Manufacturing Index for May reported that economic activity grew in May for the 18th consecutive month, providing a pleasant surprise last Friday. And while U.S. supply was significantly reduced in the auto and technology sector as a result of the earthquake in Japan, the problems are being steadily resolved.
Lower commodity prices are also a positive side effect of slowed growth. All things being equal, as commodity prices fall, growth prospects improve. In fact, Goldman Sachs Group recently turned bullish on commodities, making the case that dropping prices will stimulate growth and send commodity prices rising again. This aptly illustrates the cyclical nature of our economy.
Strong corporate earnings have allowed for cheaper stocks. Interest rates remain extremely low and aren't expected to start rising until at least a year from now. U.S. exports climbed to an all-time high on Thursday, increasing to $175.6 billion in April, and now comprise 13% of the GDP. As you can see, there is still a lot of positive information out there.
Market sentiment and media reports often go hand-in-hand. When circumstances seem glum, the good news tends to get buried behind fearful forecasts. And while it can be tempting to go with the flow and join the ranks of anxious investors, we urge you to examine every part of the economic picture before drawing conclusions.
ECONOMIC CALENDAR: Tuesday – Producer Price Index, Retail Sales, Business Inventories Wednesday – Consumer Price Index, Empire State Mfg Survey, Industrial Production, Housing Market Index, EIA Petroleum Status Report
Thursday – Housing Starts, Jobless Claims, Philadelphia Fed Survey Friday – Consumer Sentiment
Data as of 06/10/2011 1-Week YTD 1-Year 5-Year 10-Year
Standard & Poor's 500 -2.24 1.06 16.9 0.30 0.05
Dow -1.64 3.23 17.5 1.95 0.89
NASDAQ -3.26 -0.34 19.2 4.76 1.94
MSCI EAFE -2.95 1.56 24.6 1.48 2.36
10-year Treasury Note (Yield Only) 3.00 NA 3.32 4.98 5.33
Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized.
Sources: Yahoo! Finance, MSCI Barra. Past performance is no guarantee of future results.
Indices are unmanaged and cannot be invested into directly. NA means not available.
HEADLINES:
Oil prices fell 2.5% Friday on reports that Saudi Arabia plans to increase production 13% to 10 million barrels per day. The increased production is expected to slow this year’s 26% rise in oil prices and the 2% increase in gasoline.
The Fed will buy $50 billion of Treasury’s in the final series of government bond purchases that marks the last phase of QE2. Launched in November 2010, the purchases will end June 30, though the stimulus will continue with the Fed reinvesting maturing securities.
The White House confirmed that it is considering cutting the payroll taxes that businesses pay. In December employees began paying 4.2% of their wages, two percentage points less than usual, while employers continue to pay the standard 6.2%. The potential policy change hopes to improve employment numbers by promoting hiring.
Paying a total of $2,626,411, an anonymous donor has won lunch with Warren Buffett. Already winning the eBay auction, the bidder topped their previous offer by $100. Proceeds from the auction benefit Glide, an organization that benefits poverty-stricken residents of the San Francisco Bay area.
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The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq. The DJIA was invented by Charles Dow back in 1896.
The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indexes from Europe, Australia and Southeast Asia.
The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
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http://money.cnn.com/2011/06/10/news/economy/recession_economic_survey/index.htm?iid=EL
http://www.aaii.com/sentimentsurvey
http://money.cnn.com/2011/06/10/news/economy/recession_economic_survey/index.htm?iid=HP_LN
http://www.ism.ws/ISMReport/nonmfgROB.cfm
http://www.smartmoney.com/invest/stocks/why-the-market-worrywarts-are-wrong-1307117379674/
http://www.smartmoney.com/invest/stocks/why-the-market-worrywarts-are-wrong-1307117379674/
http://www.smartmoney.com/invest/stocks/why-the-market-worrywarts-are-wrong-1307117379674/
http://www.nytimes.com/2011/06/10/business/10markets.html
http://online.wsj.com/article/BT-CO-20110609-708605.html
http://www.businessweek.com/ap/financialnews/D9NP4RCG1.htm
http://www.cnbc.com/id/43356436
http://blogs.marketwatch.com/election/2011/06/10/employer-payroll-tax-proposal-panned/
http://money.cnn.com/2011/06/10/news/companies/buffett_lunch/index.htm?iid=HP_LN
