U.S. stocks endured another up and down session but the broad market held on to a late-session bump to close higher for the first session of the week – it was the one of the worst weeks of the year with the Dow down 2.94%, the S&P 500 off by 3.65%, the NASDAQ down 3.74%, the S&P 400 (mid cap) sliding 3.75% and the Russell 2000 (small cap) slipping 3.27%.

Financials led the S&P 500 marginally higher as traders viewed banks had dodged a bullet due to watered down limits on derivatives trading and investing in hedge funds – although banks were going to find a way around this anyway, but likely at a higher cost.  (Sorry to say, I don’t think banks will dodge the double-dip housing market bullet.)   And with the death of Senator Byrd last night and Senator Brown now expressing doubt he’ll vote yes, FinReg may ultimately come up short of the needed 60 votes in the Senate. 

Consumer staples led the four major industry groups that closed lower.  The other traditional areas of safety – health-care and utilities – did gain ground for the session. 

Did the overall market truly rally on the news Friday morning that FinReg was watered down?   I’m not sure as this is a strange market environment; you never know if it’s some algorithmic dollar-down computer order buying (that is, programmed to bid prices higher on dollar weakness – waning of the safety trade), as some suggested and is supported by the chart below.  And even though FinReg doesn’t appear to be a worst-case scenario for the economy’s credit outlets, House and Senate Chambers rushed agreement via a Thursday all-nighter, which doesn’t exactly give one the sense that a whole lot of consideration was given – the law of unintended consequences will likely be rife with this legislation, if it ultimately passes. 

Market Activity for June 25, 2010

Final Revision to Q1 GDP

The recovery keeps getting weaker by the revision, as the Commerce Department reported that first quarter GDP came in at 2.7% -- that’s revised down from 3.5% via the initial estimate and 3.2% via the previous revision.  I call this latest revision the “final” because that’s the old name for it.  It’s not actually a final, currently just termed the “third” revision.  These GDP figures are continually revised for years, but this is the final revision in terms of the immediate changes to the figure. 

So the economy grew at a 2.7% real annual rate last quarter and this puts the recovery at a growth rate of 3.5% over this three-quarter rebound.  That’s a pathetic bounce from the worst recession in the postwar era.  As we’ve talked about many times, the year following, one quarter removed, the worst recessions of the postwar era GDP has averaged 7.75% (for clarity, the year following, one quarter removed, means you throw out the first positive print following the recession and focus on the subsequent four quarters).  This go around we’re on pace for 3.3% economic growth – that’s assuming my numbers of 3.5% for the current quarter and 2.0% for the third quarter come to fruition.  Assuming we get 3.5% prints over the next two quarters, which is quit the stretch, then we’re looking at 3.8%.  This is nowhere near enough to kick start job growth to a level necessary to bring the jobless rate down meaningfully. 

So where did the numbers change?  Well, the largest component of GDP, personal consumption, came in at 3.0% vs. the 3.5% previously estimated.  Business spending on equipment, software, and structures was a bit weaker than previously thought. And trade dragged on GDP as imports exceeded exports by more than was estimated a month ago.

And this weaker GDP reading comes even as the inventory reading was boosted.  That’s not a good sign as it means GDP was even more dependent on short-term inventory rebuilding. 

Furthermore, personal consumption accounted for 78% of total first-quarter GDP, which is even more than the unsustainable 70% of GDP that was the case over the previous few years, thanks to the very low interest rate environment.  But households still must de-leverage and that means personal consumption as a percentage of GDP is likely to trend to its historic average of 65% over the next couple of years.  That means if businesses don’t find the confidence to take over this recovery via large spending increases then economic growth is going to turn very weak a couple of quarters out.  And large firms definitely have the resources – the GDP report also showed that corporate profit growth was revised up to 8.0% from 5.5% QoQ and 34% from 31.0% YoY – but they must have confidence in the intermediate-term future. 

The real final sales figure of GDP was cut in half as a result of inventories playing a larger role via this revision, down to 0.8% for the quarter from 1.4%.  This figure, which is GDP minus inventories, generally hits 5-6% following recession.  Weak.

University of Michigan Consumer Confidence

The UofM’s consumer confidence reading for June came in at 76.0, up from 73.6 in May and the highest reading since November 2007.  The index is derived from questions related to two components: current economic conditions, which account for 40% of the overall index, and consumer expectations (or conditions a year out), which accounts for the other 60%.  The progress in the overall UofM index has been greater than any of the other consumer confidence readings. 

The current economic conditions reading hit 85.6 in June, up from 82.9.  This marks the highest level since January 2008. 

The consumer expectations figure slipped to 69.8 for June from 70.7 – so this reading remains stuck right around the 70 level after the bounce from the depths of 2009.

What I find strange about this survey is the continued bounce in the current conditions, while the expectations reading remains stuck – this survey is notorious for this; the more predictive confidence survey from the Conference Board shows expectations lead the current conditions index, which is what you’d expect logically.

The reason:  For the current expectations segment, the UofM asks how the respondent is getting along financially relative to a year ago – and it doesn’t take much for most people to say yes since the year ago period was just coming out of the most tumultuous economic period in a very long time.  The expectations question asks if respondents believe they’ll be better off a year from now than they are today.  (The Conference Board’s current conditions question asks only if conditions are “good” or “bad,” not how things are relative to the year-ago level.) 

The fact that more people do not believe this will be the case (that they’ll be better off a year from now) shows why one shouldn’t believe consumer activity will expand just because the overall UofM reading has increased to the highest level since 2007.

Oh Boy!

You may recall last week we talked about the weekly leading index out of the Economic Cycle Research Institute, as that reading has taken a dramatic turn for the worse.  We’ve been watching this number very closely, and Friday it moved closer to the critical reading of -10 as it slid to -6.9 from -5.8 in the week prior (that is, the index declined 6.9% on an annualized basis).  When the index hits -10 it has predicted every recession since 1970.

G-20

I came in prepared to talk about the G-20 meeting that just concluded.  I’m still trying to decide whether it’s worth the time.  These meeting are always laden with a certain degree of meaningless political rhetoric, the vast majority of which never gets implemented –and this one offered some of the most outrageous comments, specifically with regard to reducing deficits and paying down government debts.  Maybe we’ll touch on this tomorrow. 

Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900