Dow 16,000 and the Economy

It was another great week for the markets with the biggest surge coming at the end of the week. The Dow is above 16,000 and it’s time to take a look at what’s at work in the economy and if it can help support the next leg of the rally.

Let’s text while playing soccer on a new couch

In October, retail sales rose 0.4%, above economists’ estimates of a 0.3% rise. Even excluding vehicle and gasoline sales, retail sales rose an impressive 0.3%.  Sales at electronics stores rose 1.38% in October, led by the new iPhone. Sporting goods sales rose a healthy 1.65%, clothing sales climbed 1.39% and furniture sales improved 1.02%. We haven’t seen this kind of improvement in retail sales since July.  Overall, the October retail sales report suggests that this holiday shopping season may be stronger than expected.

No inflation here

In October, the CPI declined 0.1%. This was lower than economists’ consensus estimate of 0%.  The decline in the October CPI was due largely to a 1.7% decline in energy prices (which also included a 2.9% drop in gasoline prices).  The core CPI, which excludes food and energy prices, rose 0.1% in October, in line with economists’ estimates.  Prices at the consumer level remain in check. Over the past 12 months the CPI has risen just 1%, representing the lowest inflation rate since October 2009. The core CPI has climbed 1.7% in the past year. With inflation rates at historic lows, the Fed has more flexibility to continue quantitative easing, so Wall Street welcomed the surprising drop in consumer prices.

Time to buy a little condo in the city?

In October, existing home sales fell 3.2% to an annual rate of 5.12 million. This came below economists’ estimates of a 5.2 million annual rate. Breaking it down, single family home sales fell 4.1% while condo sales advanced 3.3%. At the current sales pace, there are enough existing homes to fuel a 5 month supply, indicating tight inventories.  The median sales price of an existing home also now stands at $119,500. While the data indicate that existing home sales are decelerating, they are still 6% higher than they were in October 2012. For 28 months in a row, existing home sales have been higher than year-ago levels. The median home price is also 12.8% higher than it was this time last year. So we’re still seeing improvement in the housing market.

Improvement on the jobs front

Last week, jobless claims fell 21,000 to a 323,000 annual rate. This outperformed economists’ expectations; the consensus called for claims to fall to a 335,000 annual pace. Meanwhile, the four-week moving average dropped 6,750 to 338,500. Jobless claims remain near multi-year lows. While these aren’t blowout results, lower layoff activity coupled with the modest uptick in hiring are good signs for the jobs recovery.

Is it going to cost more to cook Thanksgiving dinner?

In October, the PPI retreated 0.2%. This was lower than economists’ consensus estimate of a 0.1% decline. Like the CPI report, the drop-off in October wholesale prices could be traced to a 1.5% drop in energy prices (and a 3.8% plunge in gasoline prices). At the same time, wholesale food prices rose 0.8% (the most since March) on gains in prices for beef, vegetables and baked goods. The core PPI, which excludes food and energy prices, rose 0.2%, double the consensus estimate of a 0.1% gain. While the jump in wholesale food prices came as somewhat of surprise, wholesale inflation also remains at historic lows. The PPI has risen just 0.3% in the past 12 months while the core PPI has gained 1.4%.

That’s all I have for you this week. I’ll be back on Monday with the latest market commentary and a fresh set of stock ratings in Portfolio Grader.

Have a nice weekend!

Sincerely,

Louis Navellier

Louis Navellier

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