The Market and The Economy

Last Tuesday, the S&P500 set another all-time closing high. It did it again on Thursday and once more on Friday.

The Dow Industrials set its own new all-time closing high on Friday as well. That’s the fourth month in a row for the Dow and the S&P to each have had a monthly gain. The NASDAQ also had a positive result for May. Wasn’t bad for those who chose not to sell during May.

What else? Well, we saw the 10 year Treasury note hit its lowest yield in 10 months on Wednesday. Gold fell to its lowest in nearly four months on Friday. And, the Commerce Department said that its second revision of the first quarter GDP data, (there’ll be one last revision a month from now) showed negative growth of 1% over that period.

The markets pretty much paid no attention to that GDP info. It’s old news, weather-related and, more important, not really reflective of what’s going on in the economy today.

The market

The market and the economy frequently move at different speeds and, occasionally, in different directions. (For the record, when I refer to the market, I mean stocks in general.)

When the S&P500 hit one of its recent all-time high on May 23, only about 20 of its companies reached 52-week highs, the data show. That’s the lowest number in a year. A bull market will, typically, create multiple new highs over its life. The fact that the number is low suggests the market may be getting a little tired for the near-term. That’s further reinforced by the overall low trading activity.

A correction seems to have already taken place within many of the former market leaders. According to Jeff Saut, chief market strategist at Raymond James, “high-flyer momentum stocks in the S&P 500 are off more than 30 percent, the average stock in the Russell 3000 is off 15 percent from the most recent high, the average stock in the S&P 600 index of small-cap stocks is down nearly 19 percent, the average S&P 500 large-cap stock is off 9 percent.”

What’s that all mean? Well, in my way of thinking, it seems that while we may still have a correction, it’s possible that it’ll neither be too broad nor too deep, due to what’s happened already. The other thing is that, with all the ongoing talk about one, that talk may have caused traders and investors to peel back some profits already, an action that could further minimize the result of any correction.

The economy – like a duck in a pond

Here’s how I came up with that analogy.

When you see a duck moving serenely across the pond, what you don’t see is their feet just paddling away to create the motion. In my mind, that’s what’s going on in today’s economy. The general lack of activity in the markets is more than offset by growth across the economy. That’s getting little to no notice and, in sum, adds up to a stronger foundation for stocks to eventually move higher.

Here’s some examples to demonstrate that.

This past week, the Labor Department reported that weekly initial jobless claims fell more than expected. More important, the four week average – which helps normalize the weekly changes – was reported as being at its lowest since 2008. That’s major and it looks as if that trend is continuing lower.

Here’s another. Cullen Roche, writing at Pragmatic Capitalist, says that, “Intermodal rail traffic came in at 8.6% on a year over year basis which brings the 12 week moving average to 8.9%. That’s a new three year high in the moving average and a clear sign that the economy certainly is getting some Q2 payback after the cold snap after this year.”

This is particularly good as most of our major industrial material and materiel travel by rail so the fact that traffic is doing so well says orders are coming in nicely. Markit Economics said unfilled orders for “core” capital goods rose in April, hitting a new record high and are up 9.7% from a year ago.

Finally, Markit also noted that private sector output grew at the
fastest rate in four years in May and that the broader reading of service sector activity hit a two-year high in May.

Summary

The stock market continues to run in place for now, though, as these forward-looking indicators suggest, the economy does definitely appear to continue to improve. The big name cyclical issues should benefit you nicely as investor confidence returns and the recovery is more noticeable.

Secular bull markets don’t necessarily move straight up. This sprint and rest approach is fairly consistent with this type market – as is an occasional correction.

According to BlackRock’s chairman, Larry Fink, “there’s a tendency among investors to get lost in the all the noise surrounding daily market movements. But doing so is going to distract people from their long-term goals.”

No wonder he’s the boss – he’s absolutely correct. Own quality and stay the course…

Cheers!

Mike

509-747-3323

Securities and Investment Advisory Services offered through KMS Financial Services, Inc.

To get an overview of economic conditions, use this link. It’s updated monthly.http://www.russell.com/Helping-Advisors/Markets/EconomicIndicatorsDashboard.aspx

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