Week In Review: Stocks Fell Last Week As Incoming “Data” Remains Mixed

Stocks Fall As Incoming “Data” Remains Mixed

Stocks fell last week as the incoming “data” remained mixed which does not provide more clarity regarding when the Fed will raise rates. Remember the Fed has a dual mandate: help the economy and keep inflation near its 2% target. Right now both objectives are not being met which reduces the chance of an imminent rate hike from the Fed. We would argue that more “data” needs to be released before the Fed can raise rates. The Fed has made it abundantly clear that they remain data-dependent and will not raise rates until the “data” improves. Remember, the Fed has a dual mandate: Help the economy and keep inflation near its 2% target. Right now, neither objective is being met which is why we do not think the Fed will raise rates until the “data” improves. 

Monday-Wednesday’s Action: Economic & Earnings Data Remains Mixed

Stocks rallied on Monday and overcame earlier weakness after the Dow Jones Industrial Average crossed the unchanged line over 30 times before noon EST. Investors continue to look at incoming “data” for clues on what the Fed’s next move will be. Personal income rose by 0.4%, beating estimates for 0.3%. Consumer spending month over month was flat, missing estimates for a gain of 0.5%. The PMI manufacturing index came in at 54, beating estimates for 53.8. The ISM manufacturing index came in at 52.8, beating estimates for 51.8. The big ‘beat’ of the day came from construction spending, it rose 2.2% easily beat the Street’s forecast for a gain of 0.7%. The better than expected reading on construction spending bodes well for the ongoing housing recovery and followers stronger than expected housing starts and permits data released for the same period.

Stocks fell on Tuesday but traded between positive and negative territory after optimism spread regarding a potential deal on Greece and investors digested the latest round of economic data. In April, f actory orders fell -0.4%, missing estimates for a decline of -0.1%. Auto sales for May jumped nicely and showed the strongest pace in nearly a decade. Auto sales rose to 14.2M, beating estimates for 13.6M. The big uptick was largely due to trucks and SUVs. According to CNBC, General Motors sales rose 3 percent for the month, while Fiat Chrysler Automobiles saw a 4 percent increase. Ford sales declined 1 percent. The Dow Transports, which has been lagging badly of late, reversed losses and closed higher. Airline stocks continued to get hit after the Federal Aviation Administration’s temporary halt of United Airlines ($UAL) flights.

Stocks rallied on Wednesday after the European Central Bank (ECB) held rates steady and continued their bond buying program (QE). In the U.S., the ADP, the country’s largest private payrolls company, said employers added 201k, new jobs in May, beating estimates for a gain of 200k. Markit’s ($MRKT) PMI service index came in at 56.2, missing estimates for 56.5. The ISM non-mfg index came in at 55.7, missing estimates for 57.2. The Fed’s beige book downgraded the strength of the economy which virtually removes the chance of a June rate hike. The U.S. trade gap fell by 19% which was the largest in 6 years and eased concerns of a Q2 slowdown. In other news, the Organization of Economic Cooperation and Development (OECD), downgraded their outlook for the global economy. The Paris-based group cut its growth forecast for the U.S. to 2% in 2015, down from 3.1% forecast in March and 2.8% from 3% in 2016. The OECD also cut its forecast for the global economy to +3.1% in 2015 and +3.8% in 2016. In November, it had forecast +3.6% and +3.9%.

Thursday-Friday’s Action: OECD & The IMF Downgrade Global Economy; Jobs Beat Estimates

Stocks fell hard on Thursday after the IMF publicly urged the U.S. Fed to wait until 2016 to begin raising rates. The IMF also cut its U.S. 2015 economic growth forecast to 2.5%, down from April’s estimate of 3.1%. Separately, optimism regarding a Greek deal faded after the small nation-state said it will bundle its four debt payments to the International Monetary Fund due this month into a single payment. Greece’s EU/IMF lenders continue to urge Athens to commit to sell off state assets, enforce pension cuts and press on with labor reforms. These austerity measures would cross the Greek government’s so-called “red lines” which is the sticky point in the ongoing negotiation right now. Before the bell, weekly jobless claims came in at 276k, below expectations and last week’s 282k. U.S. non-farm productivity slid at a -3.1% annual rate in the first quarter, down sharply from the previously reported 1.9% rate. In M&A news, Dish Network ($DISH) is in talks to merge with T-Mobile ($TMUS). Before Friday’s open, the Labor Department said U.S. employers added 280k new jobs in May, beating estimates for 220k.

Market Outlook: The Central Bank Put Is Alive And Well

Remember, in bull markets surprises happen to the upside. This has been our primary thesis since the end of 2012. We would be remiss not to note that this very strong bull market is aging (celebrated its 6th anniversary in March 2015) and the last two major bull markets ended shortly after their 5th anniversary; 1994-2000 & 2002-Oct 2007). To be clear, the central bank put is very strong and until material damage occurs, the stock market deserves the longer-term bullish benefit of the doubt. As always, keep your losses small and never argue with the tape. If you want exact entry and exit points in leading stocks, or access more of Adam’s commentary/thoughts on the market. Consider joining SarhanCapital.com

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