Kristina Hooper, CFP®, CIMA® is head of investment and client strategies for Allianz Global Investors Distributors LLC. She has a B.A. from Wellesley College, a J.D. from Pace Law and an M.B.A. in finance from NYU, where she was a teaching fellow in macroeconomics.
Sometimes a little assurance goes a long way.
The stock market can be very fickle, often reversing course without warning, but it tends to respond well when there is less uncertainty—even if the news isn’t all that great. It was a quiet week for economic data with few surprises, as expected, but further evidence of recent market themes have surfaced. Here’s what we know: Housing remains on a path to recovery, third-quarter earnings have been lackluster and the economy is growing, but growing slowly. However, the specter of the fiscal cliff seems to be looming large over the consumer.
But, for investors, perhaps there was some comfort in continuity. Last week, stocks bounced back from their recent woes, crossing key psychological thresholds, with the Dow Jones Industrial Average finishing above 13,000 and the S&P 500 closing above 1400. It seems that the cease-fire in the Middle East and less gridlock on Capitol Hill also helped boost investor sentiment last week. Or the brief rally could just be the continuation of a Thanksgiving tradition: in 47 of the past 60 years, the days before and after the holiday have shown positive returns.
Built to Last?
Housing, once the scourge of the US economy, is now a bright spot. Indeed, October existing-home sales rose 2.1% to an annualized rate of 4.79 million, higher than estimated. Sales are up 10.9% compared with October 2011, while the median home price is up 11.1% since last year. Also, total inventory dropped 1.4% from September, to a 5.4-month supply at the current run rate—the lowest since February 2006. Perhaps most notable is that year-over-year sales have increased for eight consecutive months, the longest stretch since 2005–2006.
The housing recovery should have staying power, given that the supply of previously owned homes listed for sale is at 2.14 million—the lowest level since December 2002. The latest reports probably are no surprise given that we’ve already seen a stream of data in the past year that suggests the recovery is underway. This sentiment was echoed by Home Depot in its most recent earnings report, which saw better-than-expected consumer house-related spending.
Corporate profits are moving in the opposite direction, however. As third-quarter earnings season winds down, it is perhaps surprising to hear that of the 486 companies that have reported earnings to date for the third quarter of 2012, 70% came in above the mean estimate. However, the blended earnings growth rate for the quarter is currently at -0.9% and only 41% of those companies have met or exceeded revenue estimates.
Meanwhile, the euro-zone crisis seems to be negatively impacting earnings of multinational companies. For example, of the 12 companies in the Dow that provided specific revenue growth numbers for Europe, 10 companies reported a year-over-year decline in revenue from that region.
Still, the US economy is poised for some expansion, although nowhere near enough to quicken the pace of the recovery. The October Index of Leading Economic Indicators showed a slight increase of 0.2%, suggesting very low growth for the next six months. The largest positive contributors to the index were the interest-rate spread and the leading credit index, while manufacturing hours and manufacturers’ new orders remained flat. The biggest detractors were building permits and average consumer expectations for business conditions. The monthly increase in the October LEI was the second in a row, following a 0.5% gain in September.
The only big surprise of the week came from consumer sentiment. The final reading of the November Thomson Reuters/University of Michigan index of consumer sentiment was relatively flat at 82.7. While the number is slightly above last month’s reading and it’s at a five-year high, it is still well below the expected 84.0. This suggests deterioration in sentiment, likely a result of concerns over the fiscal cliff. Ironically, the cliff didn’t weigh down investors this week, but it may have finally worn down the consumer.
Looking to the week ahead, the greatest potential for positive surprise appears to be the third-quarter GDP number, which some economists believe could come in significantly higher than the October estimate released by the Bureau of Economic Analysis. However, we could see earnings pre-announcements for the fourth quarter weaken further.
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