Despite mostly downside surprises from U.S. economic data, hopes of a slower pace in interest rate normalization from the Federal Reserve pushed U.S. stocks and bonds upward the week before last.
A seesaw week for U.S. stocks ended on the upside the week before last, though the rally was more a function of slow growth rather than a booming economy. We are seeing this dynamic more and more: when bad news is good news, and vice versa, which plays a part in keeping the markets volatile.
Market Realist – Indeed, the last couple of weeks have been a case of seesaw markets. For the week ending March 20, 2015, the S&P 500 (IVV) (SPY) registered a weekly gain of almost 2.7% to end at 2,108. The Dow Jones Industrial Average (DIA) climbed 2.1% to 18,127. The NASDAQ Composite (QQQ) was the leader of the pack. It rose 3.2% to end the week at 5,026. The ten-year Treasury yield (IEF)(TLT) fell to 1.93% from 2.12% a week earlier.
The next week saw the markets swinging in the downward direction. Two weeks of negative data and geopolitical turmoil in the Middle East finally caught up with investors. For the week ending March 27, 2015, SPY was down 2.2% to end at 2,061. DIA erased all of the gains for 2015 by falling 2.3% to end at 17,713. QQQ fell 2.7% to 4,891.
The markets are responding to lower-than-expected economic data. This is casting doubts on the US recovery story. With news of slowing durable goods orders and tardy industrial production flooding the markets, most analysts slashed the forecasts for 1Q15 GDP (gross domestic product) growth.
The previous graph shows the new orders for durable goods. The Commerce Department estimated that new orders for durable goods declined by 1.4% in February. It declined by 0.4% if the auto sector is excluded. The soft data could indicate cautious business spending. This could be a factor of the strengthening dollar (UUP) and the unusually cold winter.
The weather is dampening the real estate sector (IYR)(VNQ) as well. The previous graph shows how housing starts tumbled by 17% in February—the steepest fall in almost four years. Housing starts fell to a 12-month low of 897,000.
Homebuilder confidence also plummeted for three consecutive months now. The NAHB/Wells Fargo Housing Market Index declined from 55 to an eight-month low of 53 in February. It’s important to note that an estimate above 50 indicates that more builders view market conditions as favorable rather than poor.
Read the next part of the series to understand how economic data is casting aspersions on the US recovery. It’s running lower than the expectations.