The market grew last week despite many reports of moderating economic activity. So why the growth?
Most reports referenced light trade activity as why the market did not respond to negative data. The above charts show the S&P 500 daily movement (top) and daily volume (bottom) for three months through 12/2[1]. While trade activity was light, it was no lighter than the norm for 2014. Outside of thanksgiving week, the pseudo-correction in October was the only sustained period of increased volume. With that dismissed, why the increase?
Was the increase perhaps due to increased GDP? Initial estimates had 3rd quarter GDP at 3.6% annualized, which was revised up last Tuesday to 3.9%[2]. While there would be a positive reaction to this data it would likely be contained to one day. Also it represents a revision to performance for July through September… We are two months removed from that data now. There were two details of the report that could have a sustained impact. First would be inventory build ups during the 2nd quarter did not have as much of a drag on production in the 3rd quarter as originally thought. Second would be 4th quarter GDP only has to produce 2.4% annualized to break our economy out of the 2.1% average it has experienced since the start of this expansion. Given that 4 of the last 5 quarters have been in excess of 2.6% there is a good chance of this occurring.
The Conference Board’s Consumer Confidence Index fell from 94.1 to 88.7 in November[3]. This is an important gauge for consumption, however it has been increasingly volatile in recent months. Hopefully reduced oil prices counter confidence and still spur spending. October consumer spending was up 0.2%[4].
S&P/CS Home Price Index (20 Cities) increased 4.9% year over year, down from 5.6% in August. Housing has moderated as of late, pending sales were -1.1% in October[5].
Initial Jobless claims climbed to over 300,000, the first time in over 2 months. To the contrary, Core Personal Consumption Expenditures (PCE) firmed to 1.6% annualized. The preferred proxy of the Federal Reserve (FRB) for inflation, which remains below the 2% mandate. Even if it reaches 2% the FRB is unlikely to raise interest rates if employment starts to lose ground.
So are we in a blind bull market, leading to a bubble? Likely not, we have experienced many months of strong economic data and one soft month in a global economy that has been struggling. This is likely not enough to derail momentum.
International
Germany had a good week with business expectations and climate up, falling rates, unchanged unemployment rate, improving consumer climate, and improving retail sales.
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[2] www.mfs.com – week in review
[3] www.investing.com – economic calendar
[4] www.putnam.com – economic update
[5] www.investing.com – economic calendar