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Health & Fitness

David Joy: News on the economy: Encouraging but not conclusive

Last week, stocks in the U.S. posted their best gains since last July, rising 2.7% in the Good Friday shortened week. In the process, the S&P 500 closed back above its 50-day moving average, turned positive once again for the year, and moved to within just 1.4% of its all-time high.

The push higher was prompted by firmer economic data, comments from Fed Chair Yellen that were generally perceived to be dovish, and an apparent diplomatic breakthrough in Ukraine, although its effectiveness is uncertain.

On the economic front, retail sales, industrial production and capacity utilization, consumer prices, the Philadelphia Fed report on manufacturing, and weekly jobless claims each evidenced some firming of activity as the first quarter came to a close and the second got underway.

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The news on housing was a little less upbeat, however. March housing starts and building permits were a little softer than expected, as was the April NAHB index. These readings suggest that the hoped-for rise in springtime activity in housing has yet to emerge. It is still a little early, although the second half of March did see mostly better weather in much of the country, but so far that has yet to translate into an uptick in activity. We are likely to see that same pattern in this week’s releases of new and existing home sales in March.

Earnings season off to a sluggish start
The pace of economic activity continues to rise in importance, as first quarter earnings season is unfolding as softly as expected, leaving the final three quarters to deliver the 8.1% earnings growth and 3.4% sales growth now expected for the full year.

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According to Factset, first quarter earnings are down by 1.3% and sale are up 2.1% so far compared to last year’s first quarter, with about 16% of companies having reported. The last time earnings were lower for a full quarter was the third quarter of 2012. This week, a third of the companies in both the Dow Jones Industrial and S&P 500 indices are scheduled to report their results.

Bond yields move
Bond yields also rose on the week, mirroring the move in stocks. The yield on the ten-year note climbed nine basis points to 2.72%, with all of the move coming on Thursday following the encouraging initial jobless claims and Philly Fed reports.

Lower quality bond yields fell. The yield-to-maturity of the B of A Merrill Lynch High Yield Master II index drifted lower to 6.05% from 6.08 the previous week. Gold prices fell 2%.

In another bit of good news, last week the Congressional Budget Office projected this fiscal year’s federal budget deficit at just 2.8% of GDP, below the average deficit between 1974 and 2013 of 3.1% of GDP, and the narrowest since 2007. And the final result may turn out to be even better, if April’s tax receipts are as robust as some expect, after last year’s tax increases and rise in stock values. The longer-term outlook remains sobering, however. The deficit is expected to narrow further in fiscal 2015, before widening through 2022 from rising pressure on Social Security and Medicare, subsidies for healthcare insurance, and rising interest costs on the federal debt.

As this week gets underway, the Conference Board reported that its index of leading economic indicators exceeded expectations by rising in March at the fastest pace since last November on renewed strength in the labor market.

Overall, the recent news on the economy is encouraging, but not conclusive. Continued follow-through, especially from housing, will be needed if equity prices have any chance of moving higher. Without it, valuations will begin to look increasingly suspect.

 

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The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.

The Standard & Poor's (S&P) 500 Index tracks the performance of 500 widely held, large-capitalization U.S. stocks.

The Bank of America Merrill Lynch High-Yield Bond Master II Index is an unmanaged index that tracks the performance of below investment grade U.S. dollar-denominated corporate bonds publicly issued in the U.S. domestic market.

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