Economic data over the last week was conflicted. GDP for the 1st quarter had a weak underscore, while much of the data for the start of the 2nd quarter shows a strong rebound.
GDP
Disappointing GDP data for the US during the 1st quarter is likely to get worse. Initial estimates of 1st quarter GDP was an annualized growth rate of 0.1%. Trade data released last week points to a reduction of the initial estimate. That means that rather than growth our economy actually contracted during the first quarter. While that’s concerning it’s important to remember that much of the lack in growth in the 1st quarter can be attributed to the weather. As a result recovery reports for the month of April thus far point to a robust growth rate for the 2nd quarter, cabin fever at its finest has led to consumer spending.
Jobs
Unemployment while not the center of Federal Reserve policy is watched very closely by traders as an indication of economic health. The rate fell from 6.7% in March to 6.3% in April.[1] While job growth continued, the real cause of the fall in the unemployment rate can largely be attributed to the participation rate falling. Less people in the workforce lead to a lower percentage of overall unemployed workers.
Profits
1st Quarter earnings season is coming to a close and earnings have beat expectations for 68.2% of S&P 500 companies that have reported (445).[2] This continued trend while got for stock prices is not good for the economic future of those companies. Many of those companies are achieving earnings growth through cost cutting initiatives as opposed to capital investment for future growth of sales. We need to see revenue numbers (sales) impress as much as we need to see earnings growth. In the short run, an earnings slump could mean companies are investing their future. This may cause a market correction sometime in the future, but would lead to a long term improvement to the current economic cycle.
Internationally, German economic data continues to cool as Ukrainian tensions persist with Russia. Persistence of these geopolitical conditions could dampen GDP and stock prices in EU countries that heavily export to Russia for an extended period of time. The majority of the euro zone, however, continues to improve including previously troubled nations. The European Central Bank made indications last week that it will announce policy changes in June. More likely than not, these policy changes will be in the form of a stimulus package aimed at combating deflation.
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Always remember that while this is a week in review, this does not trigger or relate to trading activity on your account with Financial Future Services. Broad diversification across several asset classes with a long term holding strategy is the best strategy in any market environment. Any and all third-party posts or responses to this blog do not reflect the views of the firm and have not been reviewed by the firm for completeness or accuracy.