Does
the U.S economy support record stock prices?
U.S.
markets closed out last week with a bang, after a better-than-expected jobs
report eased concerns about a stalled economic recovery. The S&P 500 and
Dow both surged to new highs on the news, with the S&P 500 closing out the
week above 1,600 and the Dow briefly topping 15,000. For the week, the S&P
500 gained 2.03%, the Dow gained 1.78%, and the Nasdaq gained 3.03%.[i]
Friday’s
Employment Situation report showed that the economy added a solid 165,000 jobs
in April, dropping the headline unemployment rate to 7.5%. Even better, the
report showed revised numbers for February and March, indicating that economic
activity was stronger than originally estimated.[ii]
On the downside, when we dig deeper into the jobs report, we see threats to
consumer spending as the average weekly hours worked dropped to 34.4 while
wages increased just 0.2%. Furthermore, what economists believe to be the
widest measure of unemployment, the U-6, rose slightly to 13.9%, its lowest
point since December 2008.[iii]
The U-6 includes frustrated workers who have given up looking for a job, plus
people who are working part-time because they can’t find full-time work. All
factors considered, the jobs picture looks lukewarm.
We
realize this information could raise some questions, so briefly, let’s take
stock of how the recovery is progressing:
Hiring and unemployment
are both growing at a measured pace.
On the employment front, the economy has been adding an average of 196,000 jobs
per month in 2013; this is far better than the 179,000 monthly average in 2011
and 2012, but still not as good as we would like. At the current rate of
growth, the U.S. won’t reach pre-recession hiring levels for at least another
year. The unemployment rate has improved drastically from its 10% peak in 2009;
however, at 7.5%, the current rate is still recession level, and the Fed
doesn’t expect to hit 6% until 2015 at the soonest. [iv]
The economy is improving
slowly. The economic
recovery from the recession is the slowest since WWII. The economy grew 2.12%
in 2012 and 2.5% in Q1 2013; in a normal economic cycle, these growth numbers
would be perfectly respectable, but we need higher growth during recovery periods
to generate enough jobs to bring down unemployment. Economists had hoped to see
stronger growth this year (even as high as 3-4%), but the combined effect of
the new payroll tax and across-the-board sequestration cuts is dragging down
economic performance.[v]
Economic fundamentals
and stock market performance are looking better. Despite worries about higher payroll
taxes, consumers spent at the strongest pace in two years during Q1 2013. This
is good news since consumer spending accounts for 70% of economic growth. The
housing market is booming, fueled by record-low mortgage rates and higher
housing prices. New-home sales were up 18.5% in March (from the prior year),
and homebuilders were working on more than 1 million new homes in March for the
first time in five years. Markets are also performing well above expectations: For
the year, the Dow has gained over 14% and the S&P 500 has increased by more
than 13%, showing that investors are ready to pile onto any good news.[vi]
All
told, the U.S. economy is doing pretty well. We could wish for a faster
recovery, but we have to work with the hand we’re dealt. While we may see a
slower second quarter, economists still expect healthy economic growth in 2013.
ECONOMIC CALENDAR:
Wednesday: EIA Petroleum Status Report
Thursday: Jobless Claims
Friday: Ben Bernanke
Speaks 9:30 AM ET,
Treasury Budget
HEADLINES:
States miss tax targets. Nearly half of U.S. states missed
their monthly tax withholding targets in April as investors and companies sold
off investments or made other moves to avoid steep tax bills. While this could
cause a short-term cash crunch, state revenues are already above pre-recession
levels.[vii]
European markets reach five-year highs. European investors jumped onto the
U.S. jobs bandwagon and sent European shares skyrocketing, erasing losses from
earlier in the week. With the EU’s prognosis still unknown, investors are
looking for good news wherever they can find it.[viii]
Gold ends rally, closes mostly flat. Although gold has recovered from its
recent decline, the jobs report mostly erased its gains for the week. Bullion
had been supported by recent rallies in copper and other commodities, but the
economic good news dented its rally. Often treated as a haven investment during
turbulent times, gold can be a volatile commodity.[ix]
Factory orders drop. New orders of factory goods dropped by 4% in March, the
largest drop in seven months. A Commerce Department report showed that highly
volatile aircraft sales were largely responsible for the decline. However,
non-aircraft orders increased during the same period, indicating that
businesses may be investing again.[x]
QUOTE OF THE WEEK:
“Success does not consist in never
making blunders but in never making the same one a second time.” - Josh
Billings
TAX TIP OF THE WEEK:
Don’t Forget About RMDs
Most retirement plans are subject to required minimum distributions.
Beginning on April 1 of the year after you reach age 70 1/2, you must withdraw
a minimum amount from your retirement plan or the IRS can assess a penalty
against you. To avoid this penalty, use the RMD calculator on the IRS website
to determine when you should start taking RMDs and the amount you must
withdraw.
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Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
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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 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 Nasdaq Composite is an index of the
common stocks and similar securities listed on the NASDAQ stock market and is
considered a broad indicator of the performance of stocks of technology
companies and growth companies.
The MSCI EAFE Index was created by Morgan
Stanley Capital International (MSCI) that serves as a benchmark
[i]
http://briefing.com/investor/markets/weekly-wrap/weekly-wrap-for-april-29-2013.htm
[ii]
http://news.yahoo.com/us-job-market-showing-gains-healing-slow-153324938.html
[iv]
http://news.yahoo.com/us-job-market-showing-gains-healing-slow-153324938.html
[v]
http://news.yahoo.com/us-job-market-showing-gains-healing-slow-153324938.html
[vi]
http://news.yahoo.com/us-job-market-showing-gains-healing-slow-153324938.html
[vii]
http://news.yahoo.com/many-states-miss-targets-withheld-taxes-april-162521902.html
[viii]
http://www.cnbc.com/id/100703374
[ix]
http://www.cnbc.com/id/100703062
[x]
http://www.reuters.com/article/2013/05/03/us-factory-orders-idUSBRE9420M720130503
