The U.S. Economy is Currently Benefitting From an Export Boom

Economic Boom Image5/11/11: In the markets, as in life, there are no guarantees but everyone is entitled to their opinion. Here’s my opinion on the financial markets today.

The Nitty Gritty Details:

The S&P 500’s attempt for four up days in a row is not off to a promising start.  Stocks opened slightly lower this morning on concerns that more rate hikes are yet to come from China following its inflation data.  Meanwhile, a bellwether entertainment company’s shares are selling off following its results last night, weighing on the broad averages.  Meanwhile, a major retailer and a sizable technology firm are being applauded by traders for continuing their recent trend of dividend increases.  Foreign markets are mostly higher, led by France, Germany and Japan, while rate hike fears weighed on China, Hong Kong and the U.K. markets.  Metals are broadly lower this morning on China fears, while crop prices are mostly higher following this morning’s monthly agriculture report from the USDA.  Oil is down $2 to near $102.

Looking back at Tuesday, U.S. stocks rose for the third straight day of gains as merger news and some upbeat earnings reports helped buoy sentiment.  The Chinese trade data was also well received, reflecting a strong U.S. export market.  Utilities topped the sector rankings despite the back up in Treasury yields.  Led by Media, Consumer Discretionary posted solid gains despite higher oil prices.  Energy finished in the middle of the pack despite solid gains for refiners as flooding in the southeastern U.S. boosted gasoline prices.  Commodities continued to recover from last week’s drubbing, as the CRB rose about 1%.  Oil, natural gas, agriculture and precious metals all registered solid gains.

Around our financial planning firm this morning, we were discussing four items that we thought would be of particular interest to our readers:

The Markets Broken Down:

  1. The export boom continued in March, driving corporate profits and employment. Although the nation’s trade deficit deteriorated between February ($45.5 billion) and March ($48.2 billion), exports continued to surge, and remain at all time highs, having surpassed the previous all time high (mid-2008) earlier this year.  Exports helped to lead the economy out of recession in 2009, have helped boost both overall and manufacturing employment, and have led to a surge in corporate profitability.  Half of our exports go to fast-growing emerging market nations.  Leading indicators of exports suggest the boom will persist, aided by a weaker dollar and 6 to 7% growth in emerging market economies in 2011 and 2012.
  2. Bank settlement speculation is running rampant.  Bank stocks may get some support from a report in the Wall Street Journal citing a potential $5 billion settlement for improper mortgage foreclosure practices.  The amount, if agreed upon, would be far below expectations for three to four times that amount.  Putting this issue behind them could be a positive catalyst for the large mortgage servicers.
  3. There was mixed Chinese economic data for April, but more rate hikes in China are still likely. Over the past two days, China has released a ton of economic data for April.  The data suggests that the global economic recovery that began in early 2009 remains in place (Chinese exports were up by 30% year-over-year in April), but also that the Chinese economy continued to decelerate in some areas.  Imports fell short of expectations in April, as did money supply growth, industrial production and retail sales.  New loan growth in April, however, exceeded expectations.  Perhaps the most important report was the April consumer price index (CPI) data, which revealed that inflation decelerated to 5.3% year-over-year in April, from 5.4% in March.  The result was stronger than expected, however, and the market still expects more rate hikes and policy tightening in the weeks and months to come.
  4. A sharp drop in mortgage rates over the past month (from 5% in early April to 4.67% last week) has pushed some potential homebuyers off the sidelines and into the market. The big drop in rates was accompanied by the usual surge in refinance applications.  Since the trough in mortgage rates in early October 2010, mortgage applications are down 50%, with refinance applications down more than 50%.  However, despite the 50 basis point increase in mortgage rates since early October 2010, applications for home purchases are up 7%, a sign that stability may be returning to the housing market.  The relative stability in purchase applications in the last few weeks is a hopeful sign as we continue through the key spring selling season.

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
Wealth Consultant

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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