The way the markets are behaving today, one wouldn’t think that the Commerce Department just released estimate-topping figures for third-quarter GDP (the broadest measure of economic activity in the U.S.). While analysts have warned for some time that earnings would be lackluster, investors are clearly still fretting over the shift in corporate profits.
So for the past few weeks, we’ve seen some stormy conditions in the market—in fact, from last Thursday through Wednesday, the S&P 500 saw its worst five-day performance in five months.
As for me, I’m more focused on storm that’s currently visiting my home state of Florida and soon to travel up the East Coast.
The fact is that I don’t expect today’s market uncertainty (and choppiness) to last. The Presidential Election is almost over, and once we know who’s sitting in the White House, businesses and consumers alike will have a better idea about what to expect. And already we’re getting bullish retail projections for the holiday shopping season—the time of year which tends to lift consumers’ spirits, and by association, the stock market.
But if you really want to see why I’m not sweating this recent consolidation, you’ll want to keep reading. This week brought a series of encouraging economic reports for the U.S., and just as with last week, I want you to take a breather from the doom-and-gloom of earnings to read the highlights.
September new home sales climbed 5.7% to an annual pace of 389,000. Not only did this top the 385,000 consensus estimate, it also represents the fastest pace in two and a half years! Meanwhile, September median home prices declined 3.2% to $242,400 compared with August. However, the inventory of new homes fell to a 4.5 month sales pace, the lowest level since October 2005, so the lower supply could prop up prices soon enough.
New home sales have advanced over 27% since September 2011 and median prices have climbed 11.5% year-over-year. What’s especially encouraging is that the last time new home sales have been this high was during the final days of the first-time home buyers’ tax credit. This, combined with last week’s record-breaking housing starts and building permits data, suggests that the housing recovery is gaining speed.
Continuing its latest volatile trend, last week’s jobless claims plunged by 23,000 to 369,000. Economists were looking for 375,000 claims. Meanwhile, the four-week moving average rose by 1,500 to 368,000.
While these kinds of volatile drops and surges make for interesting headlines, I always put more stock in the more stable four-week moving average, which remains well below the 400,000 benchmark. When you smooth out the week-to-week fluctuations, jobless claims have remained largely flat since the end of August.
Durable goods orders soared 9.9% in September, due to a surge in commercial aircraft orders. Excluding transportation orders, September durable goods orders still rose at a healthy 2% annual pace. Orders surged 9.2% for heavy machinery and 4.1% for primary metals, but they fell for computers, electronics, electrical equipment and communications gear.
The headline figure is encouraging, but the durable goods details are still mixed. As impressive as the September surge in durable goods orders is, it is important to realize that in August, durable goods orders declined a revised 13.1%, due to volatile aircraft orders.
The American Consumer
The University of Michigan’s Consumer Sentiment index came in 82.6 for October, up from 78.3 in September. While this came in slightly below the 83 consensus estimate, this still represents the highest reading in over five years! This month, lower gasoline prices and the recovering housing market encouraged consumers.
While I want to wait for next week’s consumer sentiment index from the Conference Board, I cannot stress how important consumer confidence is for the economy. As I mentioned earlier, consumer spending had a marked impact on the latest third-quarter GDP reading, and it was undoubtedly because Americans felt a little more comfortable opening their wallets.
The Big Picture
The preliminary estimate of third-quarter GDP growth came in at a 2% annual pace. This is significantly better than last quarter’s 1.3% pace and also topped the analyst consensus estimate of 1.7%. However, the headline figure is weighed down by a troubling detail: Business investment outside of housing declined 1.3%—the largest quarterly decline since 2009. The best news is that consumer spending picked up to a 2.1% annual pace, compared with 1.5% in the second quarter, so consumer spending remains the bright spot in the overall U.S. economy. Meanwhile, government spending rose a surprising 3.7%.
Overall, the headline growth is a pleasant surprise, and the consumer spending figures make me even more bullish about retail stocks. But the drop in business investment underscores the uncertainty surrounding the Presidential election and what will happen to taxes in 2013.
That’s all I have for this week. For my readers on the East Coast, I hope you and your families stay safe during next week’s storm conditions—for everyone else, I’ll check in bright and early on Monday!