The S&P 500 shed 2.77% last week[1] prompting the question of whether or not this was the onset of the next bearish swing in the market?
U.S.
Economic reports last week continued to support softening conditions. Here is a break down as the week progressed:
- S&P/Case Schiller Home Price Index (20 City) increased 4.3% YoY in November, missing expectations of 4.5%.
- Core Durable Goods Orders fell 0.8%, however beating expectations of a 1.3% fall.
- Pending Home Sales fell 3.7% MoM in December, much below the expected increase of 0.6%.
- 4th Quarter GDP came in below the 3% expectation, at 2.6%, disappointing given 5% 3rd quarter GDP[2].
While all of this points to a softening economic state, there was plenty to celebrate as well. GDP, while from a quarterly measure missed expectations, it should be noted that it did break the 2.1% annual trend associated with this expansion with 2.3% for 2014. Here are some of the reports that show hope for the 1st quarter:
- Consumer Confidence reached a 7 year high at 102.9, likely supported by falling fuel costs.
- New Home Sales in December rose 11.6%, stronger than expected, a good indicator for job creation.
- Initial Jobless Claims fell to 265K from 308K the prior week, a strong job market, save underemployment, could spell rate increases in the near future.
- Michigan Consumer Expectations came in at 91.0, just 0.5 under expectation, again likely aided by fuel prices[3].
International
Last week was a bit of a flip coin from recent weeks where data out of the U.S. had been strong and the international markets had been weak.
German business measures climbed, unemployment fell, and consumer climate strengthened. Improving conditions in Germany bode well for the EU given the size of their economy. The lone detractors in their reports was that retail sales came in positive, but lower than expected and consumer prices (CPI) continued to shrink.
Japanese Retail sales showed growth, however lower than expected, industrial production made good strides in growth, Core CPI came in at 2.5%, but much of that includes a sales tax hike implemented last April. It will be interesting to see what their inflation numbers look like post April of this year.
Greece may have been an outlier making noise. Greece recently held an election that brought an anti-austerity party into power. There have been many fears that this leadership may lead to Greece defaulting on their bail out or even prompt an exit from the EU. Either of these items, while unlikely, must be addressed as a possibility.
Early in the week S&P downgraded Russian debt to junk status, siting concern over ability to repay debt given oil tax dependence and western sanctions. Russia continues to struggle as a result of its action in Ukraine.
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[1] www.morningstar.com – SPX
[2] www.investing.com – economic calendar
[3] www.mfs.com – week in review