In what is sure to be a low volume session ahead of the holiday weekend, stocks opened higher as market participants weigh the eurozone’s debt troubles, the recent soft patch of U.S. data, and the old Wall Street expression that tells us to “sell in May” against prospects for growth to accelerate later in the year and strong corporate profits. On the data front, April personal income and consumer spending suggested the consumer continues to hang in there and inflation remains contained, helping preserve the market’s early gains. Some upbeat comments for the G-8 about the global growth outlook lifted overseas markets, especially emerging markets. European banks are higher on hopes of more manageable capital requirements, despite persistent sovereign debt worries that have boosted the euro to an all-time low versus the safe-haven Swiss franc. Elsewhere, weak earnings from a major technology company weighed on the Nikkei, marking its third straight losing week. Commodities are broadly higher on prospects for firming global growth and the weak dollar.
Looking back at Thursday, stocks began with early losses on disappointing data, but staged a gradual climb to end the session higher. The sluggish start followed an unrevised 1.8% GDP number that fell short of expectations and an unanticipated rise in weekly jobless claims. However, the combination of a weak dollar, strong gains in a well-known blue chip and solid earnings from retailers and technology companies helped lead the turnaround. The well-received earnings reports propelled Consumer Discretionary and Technology to the top of the sector rankings, while defensive sectors lagged. The broad Commodities indexes did not move much, although wheat, aluminum, and soybeans were standouts to the upside while crude, natural gas and silver each fell about 1%.
Around our financial planning firm this morning, we were discussing four items that we thought would be of particular interest to our readers:
- Deflation risk is fading. The inflation data (as measured by the personal consumption expenditures – PCE deflator) in today’s personal income and spending report revealed that prices paid by consumers for goods and services rose 0.3% in April versus March, and were up 2.2% from a year ago. Over the past three months, prices rose at a 4.4% annualized rate, thanks to the surge in consumer energy prices. Excluding food and energy, prices rose 0.2% in April and were 1% higher than a year ago. Just last fall, the core PCE deflator was running at 0.7% year-over-year, indicating that deflation – falling prices and wages – was a real threat. The Fed’s QE2 program was aimed at pushing core inflation higher, and the data suggest that the Fed was successful in its efforts. The next key data on inflation will be the prices paid component of the May ISM report, due out on Wednesday, June 1st.
- Personal income and spending in April point to continued economic growth. Personal income rose 0.4% month-over-month in April, matching expectations, while personal spending also rose 0.4% month-over-month, a touch below expectations (+0.5%). The data for March were revised downward. Personal income is now up 4.4% from a year ago, strong enough to support a similar (4.8%) year-over-year gain in personal spending. Both figures, however, are tepid compared to similar points in prior recoveries. On the plus side, consumers are benefiting from the creation of 2.1 million private sector jobs in the last 14 months and a rising equity market. Consumer spending is being restrained by higher energy prices and a sluggish housing market. The next key report on the consumer will be next week’s data on the employment situation in May.
- G-8 leaders in France are focusing on Mideast assistance today. Facing sharp drops in tourism and foreign investment amid rising crime and unemployment, leaders from Tunisia and Egypt are set to meet with heads of government at the Group of Eight summit in France to seek billions of dollars in aid for their economies. G-8 leaders are set to promise their support, worried that without help the two nations risk sending the message across the Arab world that revolutions produce more instability than improvement in people’s lives.
- Another interesting impact from the earthquake in Japan – conspicuous consumption goes out of style. A McKinsey & Company report shows that an increasing number of Japanese consumers are avoiding purchases of luxury items, not wanting to “show off” at a time when their country is under duress. Among the roughly 1,300 luxury goods-purchasing consumers that McKinsey surveyed, nearly half said that they felt conspicuous consumption during these hard times was in “bad taste,” a figure that nearly doubled from last year’s 24%.
As always, email me here with your questions or comments. I love to hear from you and thoroughly enjoy the “intellectual debate” with our clients and friends that these opinions generate.
Greg Powell, CIMA
Note: The opinions voiced in this material are for general information and are not intended to be specific advice. Any indices such as the S & P 500 can’t be invested into directly. Past performance is no assurance of a future result.
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