The S&P 500® Index (.SPX) closed Friday
at 919, essentially flat versus the end of last
week. Over the past five days, a mixture of good and
bad economic news continued to befuddle investors,
economists, and politicians. Since the spring of
2008, a sharp decline in home prices followed by a
plunge in consumer spending helped push the economy
to dire depths not seen in several generations. The
economy is marching along the road to recovery, but
until a healthy upward trend is re-established in
home prices and consumer spending, many investors
and economists will remain uncertain about the
rebound in the economy and the stock market.
Moving from Wall Street to Main Street
The Federal Open Market Committee (FOMC), a group
within the Federal Reserve System that makes key
decisions about U.S. monetary policy, met on
Wednesday and stated that "the pace of economic
contraction is slowing." Several government
reports released over the last few days also
provided evidence that the pace of decline has not
only slowed, but begun to turn up in many parts of
the economy.
On Wednesday, the U.S. Commerce Department
reported that durable goods orders increased 1.8% in
May and have increased in three of the past four
months. A durable good (sometimes referred to as a
hard good) is a physical product that provides
service or use over an extended period. Orders for
non-defense capital goods, excluding aircrafts,
jumped 4.8% in May, the biggest increase since
September 2004. While spending on big-ticket capital
goods is still down significantly versus one year
ago, the uptick in durable goods orders is an
encouraging sign that the rally continues to migrate
from Wall Street to Main Street.
In a separate report, the Commerce Department
said that the economy did not shrink in the first
quarter as much as previously reported. Gross
Domestic Product (GDP), a measure of the total
output of the U.S. economy, only contracted 5.5%
instead of the previously reported decline of 5.7%.
Following a similar report last week from
Philadelphia, yesterday the Federal Reserve Bank of
Kansas City reported that manufacturing activity in
the Kansas City region rebounded in June. The
production index had its first positive reading
since last August and future activity indices also
showed improvement.
The recovery is still fragile
On Tuesday, ABC News reported that its weekly index
on U.S. consumer confidence fell to -53 from -49 the
prior week. The index is now at its second lowest
level on record. Despite the rebound in the stock
market over the last three months, the
financial confidence of many investors remains
shaken. In this week's survey, the percentage of
Americans rating their own finances positively has
dropped to 39%—a fall of 13 percentage points in
the past six weeks. However, a separate report from
the University of Michigan showed that consumer
confidence increased in May. The Michigan report
stated that many consumers seem to be increasingly
convinced that the economy is in its final stages of
contraction.
While there are mounting signs that the economy
is improving, the Labor Department reported an
unexpected increase in the number of U.S. workers
filing new claims for unemployment benefits. Since
peaking in late March, new jobless claims have been
trending downward and have been one of the key
nutrients feeding the "green shoots" of
economic progress.
Housing and consumer spending showing
signs of health
The National Association of Realtors (NAR)
reported that existing home sales in May rose for
the second consecutive month, up 2.4% to a 4.8
million unit annual rate. Existing home sales have
increased 4.8% in the past two months. This is the
first back-to-back monthly gain since September 2005
and the largest two-month improvement since April
2004. The NAR also said that distressed property
sales (foreclosures and short sales) were 33% of
total sales in May versus 45% in April.
Because declines in home prices led us into this
recession, some economists think that the U.S.
economy will not fully recover until home prices
stop falling. Unfortunately, home prices are still
in the process of stabilizing. The NAR said that the
median sales price in May was 16.8% lower versus one
year ago.
The NAR report also had some encouraging signs
for home prices. The median sales price of an
existing single-family home in May increased $6,400
to $173,000. While this is a welcome increase, some
economists are concerned that the increase is not
sustainable because it reflects lower-priced houses
leaving the market through distressed sales.
For most American homeowners, their house is the
biggest family asset. Therefore, any rebound in home
prices can have a significant impact on consumer
confidence and the level of consumer borrowing and
spending.
Despite the higher jobless claims and the
continuing slide in home prices, consumer spending
rose in May. The Commerce Department reported that
consumer purchases rose 0.3% for the first increase
in three months. The gradual improvement in the
economy and the government's efforts to thaw the
credit markets seem to be making it possible for
consumers to spend more. This is critical because
consumer spending accounts for approximately 70% of
GDP. A strong recovery in the U.S. economy will
likely be delayed without a continuing upward trend
in consumer expenditures.
Economic waters will remain choppy
What do all these economic crosscurrents and
seemingly contradictory reports mean for investors?
It is a stark reminder that, while the economy is on
the mend, the road to recovery may be bumpy.
Investors should stay braced for a halting, and at
times uncertain, market ride.
(Bill Ralls is a senior vice president of
research in the Personal and Workplace Investing
division of Fidelity.)
Past performance is no
guarantee of future results.
Investing involves risk,
including risk of loss.
