MONDAY SCOUTING REPORT
The U.S. will take Monday off to observe Memorial Day.
This will give Americans time to think about the economy, which is showing signs of slowing in Q2, and the stock market, which is just off of its all-time high.
Last week saw the stock market’s first three-day losing streak of the year.
It’s worth noting this streak started when Federal Reserve Chairman Ben Bernanke suggested that the Fed could soon start to “taper” its quantitative easing (QE) program.
Has talk of the taper caused volatility to return to the markets? Have we seen the top?
- The Taper: Currently, QE involves the Fed buying $85 billion worth of bonds each month in its effort to lower interest rates, stimulate lending activity, and boost the economy. Many have argued that this has also caused bond investors to flee the bond market and head to the stock market. With the economy showing signs of improvement, people think that it has become increasingly likely that the Fed will slow down its easy monetary policy by tapering its bond purchases. On Wednesday, Ben Bernanke testified before the Joint Economic Committee of Congress. He tried to make the point that premature tightening, or tapering, of monetary policy would risk slowing or even ending the economic recovery. But he did say that the Fed could taper bond purchases in the next few meetings if the economic data supported it. And according to the minutes from its recent Federal Open Market Committee (FOMC) meeting, some FOMC members expressed a willingness to begin tapering as early as June.
- Case Shiller Home Price Index (Tuesday): Economists estimate that the 20-city index climbed 1.0% month-over-month in March and 10.2% year-over-year. “Our model projects that seasonally adjusted home prices rose by almost ½% during the reference period – the largest single-month gain in eight years,” said Societe Generale’s Brian Jones. “Indeed, that forecast, if realised, would place the average selling price nationwide 10.6% above the level posted in March 2012, marking the largest 12-month advance since the period ended April 2006.”
- Consumer Confidence (Tuesday): Economist estimate that this measure improved to 71.0 from 68.1 in April. “Stock market gains and a positive response to the April employment report are the main upside contributors,” said Morgan Stanley’s Vincent Reinhart.
- GDP (Thursday): Economist project that this second estimate of Q1 GDP was unchanged at 2.5%, with personal consumption being revised up to 3.3%. “[H]ousehold spending will likely be revised stronger and nonfarm inventories will likely be revised to subtract from growth—both suggesting more momentum in private final demand despite the softer headline figure,” said UBS’s Sam Coffin. Corporate profits probably fell for the first time since a year earlier but maintained their y/y growth pace..”
- Pending Home Sales (Thursday): Economists estimate that pending home sales climbed by 1.5% month-over-month and 12.6% year-over-year in April. “The rise in mortgage applications in April signals a likely increase in the pending home sales index,” said UBS’s Sam Coffin.
- Personal Income and Spending (Friday): Economists estimate that income climbed by just 0.1% in April, while spending showed no growth. “Personal spending increased 0.2 per cent in March, a moderation from February’s gain of 0.7 per cent, but in line with the recent trend,” said Wells Fargo’s John Silvia. “We suspect trend growth will continue at 0.2 per cent in April, as the economy continues to post moderate improvement.”
Even Wall Street’s most bullish stock market strategists have been caught off guard by the strength of the bull market.
Most have revised their year-end targets for the S&P 500 upward. Just this past week, Goldman Sachs’ David Kostin cranked up his target to 1,750, making him the most bullish strategist on the Street.
Kostin published that call on Tuesday when the S&P closed at 1,669, and then proceeded to begin its three-day losing streak.
Will Kostin’s call go down as one of the most ill-timed calls ever? Surely, those who attribute the stock market’s movements to the Fed will likely mark Wednesday’s hawkish Fed appearance with a bearish turn in the market.
Watch Doreen Mogavero of Mogavero, Lee & Co. discuss the ongoing debate in the market from the New York Stock Exchange floor: