Weekly Investment Commentary
Stocks Give Back Their Previous Week's Gains
Stocks struggled last week in the face of some weaker economic data (most notably, a disappointing April payrolls report). For the week, the Dow Jones Industrial Average dropped 1.4% to 13,038, the S&P 500 Index fell 2.4% to 1,369 and the Nasdaq Composite declined 3.7% to 2,956. These losses roughly corresponded to the gains that stocks had made in the previous week and, as a result, stocks are now at the lower end of the trading range that has been in effect for the last three months or so.
Economic Momentum Falters...
Recent data does appear to confirm that economic growth has softened a bit. The April labor market report was disappointing, as jobs grew a less-than-anticipated 115,000 (although the data also showed upward revisions for February and March). The unemployment rate fell slightly to 8.1%, but even that data was interpreted negatively as it suggests that some are giving up on finding employment and are dropping out of the workforce.
Not all of the data has been uniformly negative, however. The Institute for Supply Management Manufacturing Survey (which tends to be correlated with other cyclical variables) came in stronger than expected last week. Additionally, housing market data continues to suggest that housing may be slowly emerging from a multi-year quagmire.
Finally, we would point to corporate earnings as a source of strength. As the firstquarter earnings season winds down, results continue to be strong. In our view, it is likely that corporations will be able to maintain their high profit margins going forward, especially since labor costs are likely to remain low.
On balance, it does not appear that the economic backdrop has changed enough in recent months to cause the Federal Reserve to alter its ultra-accommodative course.
We are still not expecting the Fed to announce any sort of new quantitative easing measures, especially since core inflation remains well contained. It appears to us that the economy is still growing, but there are reasons to be concerned about its pace.
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