Housing Leads the Way

We hope you all had a blessed Memorial Day.  Before we get into market details, we first must say THANK YOU to those of you who have served this great nation. We especially thank those who have paid the ultimate price in standing up for freedom. It is not lost on us that the wealth we manage and the opportunities we help our clients pursue rest firmly on the shoulders of those men, women, and families who serve this country and protect what it stands for.

Now to the markets. Domestic and international equities posted strong gains last week as positive housing data increased investor confidence the economy can weather a potential summer rate hike. Firmer oil prices helped, with West Texas Intermediate (“WTI”) touching $50 this week. WTI crude prices rose to $49.11 from $48.30 last week, and global Brent crude prices were little changed, rising to only $49.08 from $48.96 a week ago. Supply disruptions in Canada and Nigeria helped underpin prices.

Since the release of the April Fed minutes, the tone of the Federal Open Market Committee has remained more hawkish. Chairwoman Janet Yellen said in a speech on Friday that a rate increase in the coming months could be appropriate if the labor market and economy continue to improve. Lending support to that positive assessment, new home sales jumped to their highest level in eight years and pending home resales increased by 5.1%, both easily beating consensus expectations. In related news, luxury homebuilder Toll Brothers saw shares jump after announcing strong earnings as revenue increased by over 30% year-over-year.

However, while the consumer remains strong, orders for business equipment remained weak as nondefense capital goods (excluding aircraft) declined by 0.8%. With the increased expectation of higher interest rates, bank stocks outperformed the broader market for the second successive week as financials could see a boost to their bottom lines. Interest-rate sensitive sectors lagged the market for the second consecutive week as utilities and consumer staples underperformed.  

While the domestic economy remains stubbornly sluggish, global growth discrepancies continue to favor the home team. The US economy grew slightly faster in the first quarter, revised data showed on Friday. Economic output advanced at a still-sluggish 0.8% annual rate, faster than the 0.5% gain originally reported, according to the US Bureau of Economic Analysis. Growth in the second quarter looks to be a bit more robust, with estimates running around 2.5%.

By way of contrast, global growth appears to be losing steam. J..P. Morgan estimates its global composite purchasing managers' index (“PMI”) will decline to 51 in May when all the component parts are released. With the PMI at that level, the firm suggests that global growth would slow to just 1.8%. With all eyes on upcoming data, personal spending, May non-farm payrolls, OPEC’s meeting in Vienna, and the ISM manufacturing report are potential market movers this week.

With the backdrop of continuing softness in the global economy, the leaders of the seven leading industrial nations (also known as the “G7”) said they will use all of the policy tools at their disposal to boost demand and reduce supply constraints. World growth is moderate and running below potential, and the risk of persistently slow growth remains, the leaders said in a communiqué. MPCA would suggest labor market and regulatory reform as a good place to start.