Stock Market - Big Rally On Friday
So much for the potential stock market correction. On Friday, S&P 500 rallied 0.96%, Nasdaq increased 1.58%, and Russell 2000 increased 1.98%.
Amazon stock rose 3.24% after Warren Buffett revealed Berkshire Hathaway had a stake in the company. No offense to Warren Buffett, but I don’t see how him owning Amazon makes a difference. This is one of the most widely followed companies.
Most investors love this stock; he’s just one more bull. I’m not saying it’s a sell; I just wouldn’t follow him into it. This rally brought the stock to $1,962 which is very close to its record closing high of $2,040. S&P 500 itself came within a few decimal points of another new record high.
Stock Market Ignores Bad Reports For BLS Reading
Even with the VIX falling a remarkable 10.75% to 12.87, the CNN fear and greed index only increased one point to 60. The market is up 17.5% year to date. But it’s not extremely overbought according to this index. It’s funny how the stock market is focused on economic reports now that earnings season is mostly over. And yet the market only focused on the positive BLS report which caused it to rally.
It completely ignored the weak manufacturing ISM PMI and Chicago manufacturing report. It also ignored the weak construction spending report which I will get to in this article.
As someone who follows the economic reports, I don’t fully understand the euphoria coming from equity investors. The ECRI leading index’s growth rate fell to 1.1% from 1.4% which could mean the recovery late this year won’t be as strong as previously suggested.
Stock Market - Sectors & Bond Market
Every sector was up on Friday. The best 3 sectors were consumer discretionary, communications services, and the industrials which increased 1.4%, 1.16%, and 1.24%. Amazon drove the consumer discretionary sector higher. Somehow the industrials rallied even with the weak global manufacturing PMI and the decline in the American manufacturing ISM PMI.
It’s not a huge surprise these indexes were weak because it’s not a new trend. However, the stock market is acting as they increased. I understand that the market priced in economic weakness when it corrected late last year. But now that the market is above its record high, I don’t see how we can ignore weakness.
It’s interesting that after the strong jobs report came out, the 10-year bond yield fell from 2.57% to 2.52%. It closed at 2.53% which was a 2 basis point dip. The bond market isn’t buying the economic recovery at all. 2 year yield fell 1 basis point which means the difference between the two is 20 basis points.
Odds of a rate cut this year are 47%. I simply don’t understand how the stock market can rally if investors think the economy is weak enough for there to be a rate cut. Fed won’t bail out the market as it was unanimous in voting to keep rates the same in May. Powell gave no signal he was ready to budge.
Stock Market - Construction Spending Disappoints
March construction spending report wasn’t great as month over month growth was -0.9% which missed estimates for 0.2% growth and the low end of the consensus range which was -0.5%. This report missed estimates even though the February growth rate was revised down from 1% to 0.7%. I expect monthly beats when the prior month was revised down.
On a yearly basis, February’s growth rate was revised down sharply as it went from 1.1% to -0.9%. March’s yearly decline was 0.8%.
As you can see from the chart below, the decline was led by private residential spending.
Stock Market - Real residential investment component of Q1 GDP will likely be revised lower.
It already had declined 5 straight quarters. Construction on single family homes fell 1.5%. Private non-residential spending growth was better as it was 0.5% as it was let by gains in manufacturing and transportation. That could help Q1 business investment growth which was a solid 2.7% in the initial reading.
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Spending on commercial projects fell 2.6% monthly and a whopping 8.6% yearly. As you can see, public spending has been holding up this report. On a monthly basis, there were some signs of weakness. Educational projects and highways & streets saw declines of 1.5% and 1.9%.
On a monthly basis, federal and state & local spending growth fell 2.7% and 1.1%. However, on a yearly basis, they rose 5.7% and 8.9%. Finally, spending on home improvements fell 3.1% monthly and a whopping 14.1% yearly. This report was a case of a weak headline reading being matched by weakness in the underlying numbers.
Stock Market - Employment Cost Index Decelerates
Q1 Employment Cost Index was up 0.7% quarterly and 2.8% yearly as you can see from the chart below. The monthly result met estimates. The yearly result was down from 2.9% which was the 10-year expansion high. With the relatively tight labor market and solid job gains, you’d expect accelerated earnings growth, but that wasn’t the case in Q1.
Benefits growth slowed 0.2% to 2.6% and wages & salaries growth slowed 0.2% to 2.9%. This slightly diminished wage and benefit growth is consistent with the slight decline in weekly earnings growth.
In Q3 2018 weekly wage growth peaked at 3.40%. Since then it has fallen to 3.33% and 3.27%. Don’t get me wrong. These are solid results. I’m just noting the recent growth decline. As I will get to in a future article, this trend was heightened in the April BLS report.
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Stock Market - Conclusion
I think the stock market has gone way too high based on the economic fundamentals. I don’t see why the market should ignore the disappointing PMIs and construction spending report and only focus on the BLS report.
Most economic reports have been missing estimates. Q1 real final sales growth to domestic purchasers was the weakest in 6 years. Q2 growth is on pace to be 1.7%. There are still plenty of Q2 reports outstanding, but the summation of the reports that have come out aren’t encouraging.
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