This promises to be a busy week for data and it will shape the outlook for the near term relative to growth in the US economy on a forward looking basis. The challenge, from my view currently, there is a lack of clarity going forward for growth and that has put news and sentiment in control of the market direction. The problem with that is volatility and directional changes happen on a moments notice from speculation relative to any announcement. For now investors are drinking the ‘everything is fine’ syrup. The data shows it isn’t, but the pundits say it is, and for now they win. Proceed with caution this week as all the reports will make it information overload.
On Friday the preliminary first quarter GDP was released and the number showed a growth of 2.5%. The challenge was in the details from my view, and it wasn’t good. It could have been worse, but when looking at a quarter that should have grown at 4% it left plenty of disappointment. But, as seen in the market activity on Friday it was another number glossed over by investors as they continue to be in a buy any dip mentality. Just to appease me lets consider some of the key points in the report:
- Consumption grew 3.2%, but utilities were the biggest increase in the quarter. When you note that income fell 5.3% (lowest since Q3 2009) consumers had to dip into savings (lowest since Q3 2007) to pay their electric and heating bills. Good number that was not really growth.
- Inventory buildup accounted for 1% of the 2.5% growth in GDP. That means the economy grew at a whopping 1.5% in the first quarter.
- Business investment fell 3%. If no investment in the growth of the business no jobs are being created. The earnings are growing due to stock buybacks and dividend increases. It is the best investment for bottom line growth. Shows the lack of growth in the US economy.
- Debt to GDP was up to 105% at the end of the quarter on March 31st. When will we understand that we cannot solve a debt problem with more debt?
I don’t want to beat this horse to death, but a recovery and growth don’t happen without job growth. With the current outlook this isn’t going to change much in the first month data reports for the second quarter. Unless things change going forward this isn’t going to end well. Yes, we will continue to follow the trend and invest in the opportunities presented short term, but when the Fed steps away from the stimulus dump, it is going to get very interesting for the investment markets.
Speaking of the Fed, the FOMC meeting is this week as well. On Wednesday they will announce any changes to the current monetary policy. No changes are expected, but the Fed has been hinting at deflation being an issue, and that could prompt some changes to $85 billion being poured into the economy monthly. This meeting will be watched with interest from Wall Street for any hints as to when or if any change is coming. The ECB meeting is on Thursday, and they are expected to ease rates to help stimulate some European growth. If they don’t that could disappoint markets in Europe and ripple across the big pond.
The S&P 500 Index is at a decision point. (Friday’s Notes) Does it find the needed catalyst to push higher and start a renewed push to newer highs? Or, does the index retest the lows at 1538 from earlier this month? If the data starts out on the positive side look for an initial push higher, with some building concerns into the jobs report on Friday.
There was some rotation in leadership last week as Consumer Staples and Healthcare tested the uptrend and Industrials and Basic Materials moved higher on the bump in gold and oil prices. Look to see if that transition continues this week. There continues to be consolidation in Technology and Financials. Telecom, Consumer Discretionary and Utilities remain the leaders. Europe is tagging along for the ride with the US markets and Asia is struggling with the exception of Japan. Overall the trend remains to the upside, but this promises to be a busy week and could have some influence on the overall trend as the week progresses.
As always remain focused, disciplined and aware of your surroundings. Keep your stops in place and we will see how this all unfolds.