As the cold weather finally gave way to more seasonal temperatures, stock investors should also be happy with their accounts as the S&P 500 Composite was up 2% in May. Both the Dow and S&P indices hit new all-time highs. Treasury rates were down for the month, so most bond investors made money as well. In fact, both stocks and bonds are quietly up about the same amount year to date. We have continued to see decent corporate earnings and employment data, but not much else in terms of a catalyst to move the markets sharply.
The Bureau of Economic Analysis came out with a revision of first quarter GDP growth which reaffirmed our economic wallowing. The original GDP measure published by the Bureau for the first quarter estimated GDP growth at +0.1%, but was recently revised down to -1.0%. This doesn’t mean we are in recession territory, but it may weigh on how fast the Fed will want to continue tapering or consider raising rates. It appears that the primary reasons for the weak economy in the first quarter were the harsh winter weather and lower than expected inventories. The worst of the weather is behind us and inventories generally bounce back pretty quickly. In fact, I would guess that next quarter’s GDP growth rate will be artificially high to compensate for the first quarter’s soft number. Regardless, I don’t believe this is any time to panic.
Focusing again on earnings, it appears that corporations are using the low interest rate environment to buy back existing stock and refinance old debt as opposed to expanding their business. These techniques make the books look good, in addition to helping boost the stock price, but they don’t organically grow the earnings and balance sheet long term. Until we see companies really show that earnings are growing in a sustainable fashion and not from mere financial tinkering, we may continue to languish in a stage of ebb and flow.
One of the benefits of stocks going through this quiet period is that volatility is as low as it has been since 2007. Stocks may not remain so tame in the coming months, but I remain optimistic that the worst is well behind us and we pause merely to prepare for the prosperous times that lie ahead.
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