The geopolitical fears from last week disappeared instantly with the French election results, which fueled a relief rally on Monday. And then some good corporate earnings news helped push the march higher in stocks.
On Tuesday, the Nasdaq hit an all-time high as the other major indices came close to doing the same. Interest rates also turned higher as investors sold bonds and went into full “risk on” mode.
Thanks to Dent Research, provided here is our weekly information roundup ending the week of April 28, 2017. We start each subject with what you hear in the news and finish with what that information means to you. We hope this information will help you separate the noise from the news.
First-Quarter U.S. GDP Grows 0.7%... This is the slowest rate of quarterly growth since the first of quarter of 2014, when GDP contracted by 1.4%.
What it means – Despite strong growth in non-residential business investment (9.4%), a collapse in consumer spending dragged the economy down in the first quarter. Consumer spending grew a paltry 0.3%, a number not seen since back in 2009, as we slowly picked up the pieces from the fallout of the financial crisis.
As I noted last week with sluggish retail sales, there’s a disconnect between how consumers feel versus how they spend their money. This dissonance hit the auto industry hardest. After a long run of steady growth, consumers pulled back their spending on cars by nearly $20 billion last quarter.
One sector unaffected by the consumer pullback was the RV industry. This is a space we’ve talked about for years, since we expected the massive of wave of Boomer retirements to drive RV sales.
New Home Sales Jump 5.8% in March… The increase in sales didn’t come at the expense of prices, which moved up 7.5% to $315,000.
What it means – The back-and-forth continues. Last week housing starts slowed, permits dipped, and existing home sales recouped their losses from February. This week, it looks like new home sales are off to the races. Housing bulls and bears both get something to champion, and complain about. It’s hard to argue with new home sales up 15.6% over last year, but let’s keep in mind that we’re still at just an annualized rate of 621,000 units, less than half of what we were churning out at the height of the housing boom.
Home builders have done a good job of not getting ahead of themselves, creating only what they know they can sell. This measured pace serves the industry well, but it takes a toll on buyers, who have to pay higher prices.
February S&P CoreLogic Case-Shiller Home Price Index Up 5.9% Over Last Year… After a long sideways move, the price index ticked higher.
What it means – The long plateau had me concerned that the next move would be lower. Based on modest income gains, rising mortgage rates, and tough lending standards, real estate had all the markings of an industry about to roll over. And yet, here we are. Prices are still climbing.
The small number of homes for sale means that buyers have to fight for inventory, leading to bidding wars in several markets.
I have no idea how long this can last, but the time to sell is when the market is hot.
Durable Goods Orders Up 0.7% in March, Down 0.2% Excluding Aircraft… Both numbers were short of expectations.
What it means – Drilling down even more, core capital goods orders (which excludes aircraft and defense spending) increased a mere 0.2% last month. They are up only 3.0% over last year, and saw gains in shipments.
Getting more orders out the door this month creates a drag on orders for next month, so it’s not a good sign. Durable goods orders have been muted for some time, so none of this is a surprise. It just affirms our weak forecast for GDP in both the first quarter, and now the second too.
The European Central Bank (ECB) Makes No Changes… The benchmark rate is still 0.00%, the deposit rate is negative 0.40%, and the bank did not change any of its guidance.
What it means – Think about those numbers. The central bank for the largest economic bloc on the planet held deposit rates at negative 0.40%, and its benchmark lending rate at 0.00%. The “no change” status of its outlook means that the bankers still see inflation below their target rate of just above 2%, and subpar GDP growth for years to come. And the ECB is still printing more than $60 billion a month to buy bonds. It’s amazing that we’ve become complacent and now think of these numbers as normal.
ECB President Draghi and his compatriots might tell us this is status quo, but there is trouble under the surface. The Eurozone is still grappling with a banking crisis. Non-performing loans make up almost 20% of Italian loans, and close to half of Greek loans. And those countries owe Germany a lot of money. It wouldn’t take much of a crisis for the entire system to fall apart.
President Trump Proposes Tax Reform... The president issued a brief proposal that calls for simplifying the tax code by reducing the tax brackets, lowering tax rates, and eliminating deductions.
What it means – “Brief” is an understatement. At all of one page, the proposal was a bit short on details. The plan did call for eliminating deductions like local and state taxes, which won’t sit well with residents in high tax areas like New York City and San Francisco. It also called for reducing corporate taxes to 15%, on par with those of other nations. Like anything else, the devil is in the details.
Can we reduce the complexity of our tax code without materially changing how much tax we collect, and not shift the burden dramatically? That’s a tall order, but it’s doable. If nothing else, perhaps we can get rid of the entire tax planning and tax avoidance industry in the U.S., focusing the money spent on those endeavors on more productive projects.
Nordstrom Offers Mud-Caked Jeans for $425… The upscale retailer also offers pre-stained denim jackets.
What it means – Offering and selling are two different things, but I’ve got to believe that someone, somewhere, thinks that half a grand for jeans soaked in mud is just the ticket. But where do you wear them? A monster truck show, or tractor pull? Would the same people who spend $425 for such an item go to such events?
And if we’re seriously discussing the topic, then let’s figure out what kind of mud was used. Is it red dirt from the Southeast, or black clay from the Midwest? Is there a market in muddy jeans from different parts of the country?
Next Week – The first week of May is light on economic reports, but includes the U.S. Employment Situation report on Friday.
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