Last week was another strong one for equities, as the S&P 500 gained 2.1%. It was the fourth straight weekly gain, during which time it has risen 7.2%. It ended the week 16.9% higher for the year to date. The resilience of this rally has been something to behold.
There have only been four weeks all year in which the S&P 500 fell, with an average decline of less than 1%. And there have been only six down weeks in the six months since this rally began last November, and the average decline is still below 1%. For the month of May at the sector level, financials, industrials, consumer discretionary and technology stocks are beating the market in anticipation of improving economic activity in the months ahead, and providing some optimism that this rally can be extended with cyclical groups which have mostly trailed.As has been noted, the economic data coming at the end of the first quarter was soft. Since then, it has improved, but has been mostly a mixed picture, some good and some disappointing.
Toward the end of last week, however, investors got some welcome news in the form of an unexpected jump in consumer sentiment, and a larger rise than expected in the index of leading indicators. The Thomson Reuters/University of Michigan Consumer Sentiment Survey for May rose to its highest level since July 2007. That was five months before the recession began.
Consumer balance sheets continue to benefit from rising asset values, including homes and financial investments. Not so coincidentally, according to the latest Federal Reserve Quarterly Flow of Funds report, at the end of last year consumers’ net worth rose to within 2% of its highest level ever in the third quarter of 2007. Stock prices are up 6.2% in the second quarter, and housing prices certainly appear to be rising, although the data is released with a sizeable lag.
The National Association of Home Builders/Wells Fargo Housing Market Index rebounded in May back to its March level, but remains lower for the year. Housing starts were softer in April, but building permits were strong. The Federal Housing Finance Agency Home Price Index for March will be released on Thursday, and is expected to have risen 0.8%, a slight acceleration from the recent pace. It has risen in each of the previous thirteen months. On May 28, the S&P/Case-Shiller Home Price index for March will be released and is also expected to show a rise of similar magnitude. It too, has risen in each of the past thirteen months, for a cumulative gain of 9.3%.
New home sales plateaued in the first quarter, but at a higher level for the quarter. Sales are forecast to have risen 1.4% in April. New home sales are anticipated to show even more strength. It seems a good bet that at the end of the first quarter consumer net worth was at a new high. Also contributing to the better feeling among consumers was April’s rebound in non-farm payrolls, and the upward revisions to the prior two months’ totals. Last week’s rise in weekly jobless claims was an outlier, but continuing claims continue their long-term trend lower.
The rise in leading indicators was also welcome news, not simply because of the magnitude of its increase, but because of the number of indicators contributing to the improvement. With a rise of 0.6%, it was the biggest monthly increase since February 2012. And, it followed a decline in March after three straight monthly gains. But seven of the ten factors were positive in April, compared to six in March. Turning positive were average weekly jobless claims, manufacturers’ orders for consumer goods, and building permits, the biggest contributor.
Consumer expectations for business conditions was one of the three negative contributors, along with ISM new orders, and the length of the average workweek. The latter may have been impacted by furloughs associated with the sequester, but if the University of Michigan survey is accurate, perhaps consumer expectations have also recently turned positive. In February, when the index last rose, seven indicators also rose, and one was flat, so the broadening in April is something of a course reset after what was clearly a weak March.Along with still-reasonable valuations, low inflation and an accommodative Fed, faster economic growth in the months ahead is the narrative that is driving this market higher, and the rotation into cyclicals along with it.
The minutes from the last Fed meeting will be released on Wednesday. They will provide some insight into the current mindset of the Open Market Committee regarding the pace and duration of QE3. Investors misinterpreted the Fed’s intentions after the January meeting minutes were released on February 20. It took some clarification from Chairman Bernanke a few days later to calm the waters. That will be the focus this week, taking precedence over scheduled reports for new and existing home sales, durable goods orders, and weekly jobless claims. All of these data points are important to the narrative, but the Fed’s intentions hold the key to this rally.
Disclosure
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed.
This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.The University of Michigan Consumer Sentiment Index Thomson Reuters/University of Michigan Surveys of Consumers is a consumer confidence index published monthly by the University of Michigan and Thomson Reuters.
The NAHB/Wells Fargo Housing Market Index gauges builder perceptions of current single-family home sales and sales expectations for the next six months as 'good,' 'fair' or 'poor.'The S&P/Case-Shiller® Home Price Indices are designed to measure the growth in value of residential real estate in various regions across the United States.
Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution and involve investment risks including possible loss of principal and fluctuation in value.
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