Economic Gains Boost Stocks

The topic of new stock highs continues to dominate conversations these days. Some argue the economy simply doesn’t support the market while others are convinced that the concurrent improvement in stocks and economic indicators portends better times ahead. The S&P 500 (pictured below) is now up 9.1% for the year, having increased 2.7% for the month so far. The index is just a few points away from its all-time highs. Once crossed it will join the company of other indexes exploring new heights like the Dow Jones Industrials and the Wilshire 5000.

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Retail sales released earlier in the week gave stocks a substantial boost. Economists and analysts have been concerned that the increase in payroll taxes and delayed income tax returns would put a damper on sales. But sales increased by a very strong 1.1% in February, which follows a 0.2% rise in January. If the consumer remains engaged, there is hope the recovery will survive the recent slow patch and regain its momentum.

Surprising strength in employment has also supported the recovery lately. Initial jobless claims fell by 10,000 in the week of March 9th continuing a string of improvements. The four-week average is now at its lowest level of the recovery, down 2,750 from the prior week to a 346,750 level. Historically, during previous recoveries the Federal Reserve would generally begin unwinding its accommodative policies at levels not far below current jobless claims, but all signs from the Fed so far suggest that will not happen soon.

The longest supporter of the economy has been the industrial complex which continues to look relatively healthy. Industrial production rose 0.7%, in February and more than forecast. A report today also showed that the manufacturing sector in the New York area was growing, but slightly slower than February’s.

However, not all the news is good. The Thomson Reuters and the University of Michigan March consumer sentiment gauge fell to 71.8 from 77.6 in February. The measure was projected to increase to 78. The weakness was in the expectations component which fell 8.5 points to 61.7, the lowest reading since the fiscal impasse and US ratings were cut in the third quarter of 2011, according to Econoday. Continuing budget problems in Washington as well as rising gas prices likely influence consumers’ outlook for the economy.

Rising prices have also been detractors for the week on three levels; consumer, producer and import. Higher energy costs were mostly to blame. The consumer price index jumped 0.7% in February, following no change in January. The core CPI, which excludes food and energy softened to a 0.2% rise after increasing a strong 0.3% in January. Energy jumped a monthly 5.4% after a decline of 1.7% in January. Gasoline surged a monthly 9.1% after falling 3.0% in January. Year-on-year, overall CPI inflation increased to 2.0% in February from 1.6% in January.

Energy prices were mostly to blame for the boost in the producer prices as well. The headline number increased a strong 0.7% for February compared to a core of only 0.2% (excludes food and energy). The headline PPI was 0.2% in January. According to Econoday, food prices declined 0.5% after jumping 0.7% in January. Energy costs in February accelerated to a 3.0% boost, following a 0.4% decline the prior month. Gasoline spiked 7.2%, following a monthly decrease of 2.1% in January.

As with the prior two categories, energy caused a sharp 1.1% increase in import prices. With petroleum products removed, prices remained unchanged for the month.

It is fair to say that none of the price increases mentioned above concerns the Federal Reserve to any significant degree. Recent announcements by Reserve Chairman Ben Bernanke and Janet Yellen indicate the Fed will continue to buy government bonds at least through the year.

So for now, barring any new crises or the worsening of existing ones, there doesn’t appear to be any reason to expect significant changes in the capital markets in either direction.

A New Pope, a new direction

There does however appear to be significant indication for a change in the direction of the Catholic Church. Peggy Noonan of the Wall Street Journal summed-up very well why Catholics, Protestants, and so many more watched for the cardinals’ decision

“After the conclave, I’m grateful for two other things. First, after all the strains and scandals they still came running. A pope was being picked. The smoke came out and the crowd was there in St Peter’s Square. They stood in the darkness, cold and damp, and they waited and cheered and the square filled up. As the cameras panned the crowd there was joy on their faces, and the joy felt like renewal.

People come for many reasons. To show love and loyalty, to be part of something, to see history. But maybe we don’t fully know why they run, or why we turn when the first reports come of white smoke, and put on the TV or the computer. Maybe it comes down to this: “We want God.” Which is what millions of people shouted when John Paul II first went home to Poland. This is something in the human heart, and no strains or scandals will prevail against it.”

Have a nice weekend.

 

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Sam Bass
[email protected]aconwc.com