Economy Versus Expectations

The US economy/GDP grew at 1.5% for the second quarter. Yes, that was better than the expected 1.3% growth, but it’s still not not a great number to provide stocks a sustained¬†upside. The consumer sentiment was better than expected as well, but again still a relatively weak number to base further growth in stocks relative to the economic growth. This week ends the month of July and there will be plenty of data to¬†digest as the week progresses. The Jobs Reports will be on key ingredient with ADP reflecting¬†what is¬†happening with the private sector, Jobless claims are a question on¬†how we are dropping without hiring, and the¬†government¬†Jobs Report on Friday¬†with estimates for only 110,000 jobs added. ISM Manufacturing data on Wednesday with estimates to climb back above the 50% expansion level again. If it fails to make that level it would be¬†a big negative looking forward. ISM Services numbers on Friday with expectations at 52.9%. The services have been stronger the last couple of months, but the earnings data is showing some slowing in the leisure sector? The economy has been gradually declining since February, and it is in need of some signs of life going forward. If the market is to sustain any type of uptrend the economic picture has to change/improve.

Despite the current economic picture the expectations are for the Fed to¬†step up¬†some type of stimulus activity following the FOMC meeting on Tuesday and Wednesday. What kind of stimulus would prompt investors to put money to work in stocks and¬†accept more¬†risk than they have been willing to accept over the last four months? Quantitative easing and/or a 25 basis point rate cut to absolute zero for the overnight¬†Fed Funds Rate. Will that change what is happening¬†with economic growth looking forward? That is a million dollar question and if we base the answer on the¬†last two¬†stimulus packages, it¬†isn’t likely to change the rate of¬†growth looking forward. The ECB meets next week as well and there are rumors of a rate cut. Treasury Secretary Geithner is meeting with Draghi on Monday sparking more rumors of a coordinated effort for stimulus to get the global economies going. Talk is cheap and actions are slow. All eyes and ears will focused on some type of coordinated central bank action this week. If not, there will be disappointment in the markets.

My conclusion would be more in line with the old adage of, ‘buy on the rumor… sell on the news.’ Thursday and¬†Friday brought plenty¬†of buying on the rumor¬†that the ECB (European Central Bank) is willing to do whatever it takes to preserve the euro and the European Union.¬†There is also the anticipation the US Federal Reserve will provide additional stimulus. The combination is¬†focused on¬†a jump starting the global economic growth. Thus, the rumor sounds good, but the reality may be¬†something entirely different than what investors think. Thus,¬†take the trade as it is offered on the rumor and protect against the downside risk of the reality of the news.

Big earnings week for the S&P 500 index with about 20% of the stocks reporting earnings. Thus far 60% of the S&P500 stocks have reported with 60 percent missing estimates on revenue, according to Standard and Poors. That is a disturbing data fact. It reflects the slowing consumer and business spending seen in the data the last several months.. The good news is that two-thirds have beat on earnings. Thus, the reason the economic picture has to improve… earnings and revenue growth for stocks are stagnant to declining.

This promises to be a rumor, news and emotional filled week for investors. It really comes down to which you believe more, the economic data or the expectations that actions taken by the central banks will kick start the growth in the economy and thus growing revenue and earnings. Not an easy choice.