Bulls were hoping that stocks would turn on the juice and move confidently toward new highs on Friday, but that was not to be the case. The good news was that the S&P 500 did notch its second-straight, all-time high closing price, but it did so by gaining less than two points for the day. The bad news was that it is still a couple of points below its all-time intraday high, so that took a little luster off of Friday’s record close. A bigger upside breakout would have been preferred, but then again, a record close is still a record close, so that was at least a good way to close out the week.
It was another one of those weeks that showed investors are still a bit skeptical about the economy, which remains unable to get its act together. Retail sales came in flat on Wednesday, and the consumer confidence report for May that we saw Friday was also disappointing. Economists were looking for a reading of 94.5, but the 88.6 level we saw suggested that consumers are still on the sidelines. This number was down from April’s 95.9, and it added to the gloomy picture that we continue to see on the economic front. As we have seen over the past few months, the numbers are not overly bad, but they are simply not that great.
If anything, we are seeing numbers that show a decelerating economy and a general lack of confidence. Against this backdrop, we also keep hearing about “if and when” the Federal Reserve might hike interest rates. The dismal first-quarter GDP number that showed a 0.2% growth rate is still hanging over the stock market like a dark cloud, so it is easy to understand why investors are reluctant to jump back into the stock market right now. It was not that bad of a week, though, and we saw weekly gains of 0.5% for the Dow, 0.9% for the Nasdaq and 0.3% for the S&P 500.
In other economic news on Friday, we saw industrial production for April fall by 0.3% versus the 0.2% decline that economists had expected, and that 0.3% slide matched the decline we saw in March. Again, these ongoing numbers are not overly bad, but they are just not that strong. There are enough weak economic numbers to really question whether a Fed rate hike is needed right now, and this has created enough doubt among investors that a Fed rate hike could really cause a hit to investor confidence. A rate hike could possibly torpedo an already weak-looking economy. So again, the thought of a rate hike anytime soon is a big worry.
Janet Yellen is set to speak next Friday, so maybe she can shed some light on the current economic situation. We will just have to wait and see what Ms. Yellen has up her sleeve. There was not much talk or commentary this week from the various “Fed Heads,” so the stock market had very little besides economic reports to digest. Earnings season is winding down, and like the economic reports of late, it was good but really not all that great. We do get some retail numbers next week from the likes of Wal-Mart (WMT), so maybe that will shed some additional light on the consumer sector of the economy.
Interest rates had been creeping up over the past month, and the yield on the 10-year U.S. Treasury had actually risen from 1.85%, to nearly 2.3% this week. It did pull back on Friday to end at 2.14%, but the recent trend higher had caught the attention of investors, and that rise could have helped keep a lid on equity prices over the past week. Rates are still historically very low, but any sort of upward move can easily turn into market nervousness. Throw in the recent talk of “if and when” the Fed might raise rates, and you have the makings of a skittish stock market.
The recent weak economic news and the non-existence of inflationary pressures give the Fed few reasons to raise interest rates anytime soon, so that is one big plus for the stock market. Had we seen a more robust economy and signs of inflation, the Fed would have a “green light” to raise rates a quarter or a half of a point. But that is not what we are seeing, so the odds seem to favor no rate hike until 2016 at the earliest. Many bulls are surprised that stocks are not acting more positive to these developments, but the lackluster response is a bit worrisome for the bulls.
We will continue to watch the ongoing parade of economic news, so maybe we will get a clearer picture next week as to which direction the economy and the stock market might be heading. In the meantime, the Gorilla wishes each and all a relaxing weekend. We are now heading into the last half of May, and summer is right around the corner. Again, have a great weekend, and we will be back in action on Monday!
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