Economy Turns Down

The Commerce Department released its second estimate of first-quarter GDP this morning, and as expected, a disappointing quarter has gotten worse. Where the first estimate showed that the economy had grown by just 0.2 percent last quarter, now Commerce estimates that it actually contracted by 0.7 percent.

One of the primary factors in the revision was that imports grew much faster than originally estimated. With the dollar still strong, it's no surprise that Americans have been buying more cheaper imported goods lately. Meanwhile, U.S. exports declined by the most since the first quarter of 2009, in the middle of the recession.

This result marks the third time since the end of the recession that the economy has shrunk for a quarter, following the first quarter of 2014 and the first quarter of 2011. Both those turned out to be temporary blips; let's hope this one is too.

A Shortage of Stocks

Here's a hidden factor as to why the market has continued to increase: All those buybacks have created a shortage of stock shares for sale. According to the Market Technicians Association, the number of "investible" publicly traded companies, which they defined as those with a share price above $5 and a market capitalization of more than $25 million, has fallen by 25 percent over the past 13 years.

Over that same time frame, the average share price of the 500 largest U.S. stocks has doubled from $40 to $80. In addition to stock buybacks, the Market Technicians blame mergers and acquisitions, which also reduce the number of a company's shares.

The dealmaking trends show no signs of easing up, either. In the first quarter, companies bought back a record $247 billion of their own stock, and according to Thomson Reuters, global M&A for 2015 has already totaled $1.5 trillion, up 23 percent higher from the same time period in 2014.

Home Prices Chugging Along

The housing market keeps chugging along: According to the S&P/Case-Shiller Home Price Index released yesterday, American hosing prices have now climbed for 35 consecutive months. While historically home prices have risen about 1 percent a year, they're currently rising at 4.1 percent on an annual basis.

But the rate of increase has been slowed significantly. In the first three months of this year, home prices nationwide gained just 0.8 percent. That’s down from 1.2 percent during the first three months of last year and 2.8 percent in the same period of 2013.

The hottest cities for home prices include San Francisco, where prices increased 10.3 percent in the past year, and Denver, where they increased 10 percent. There isn't a market in this index in New Jersey, but the New York City market was the only one to post a decline in the past month, of 0.1 percent, although it still increased by 2.7 percent in the past 12 months.

Wall Street Takes a Nap

We may have just gotten done with a long holiday weekend, but it was last week when Wall Street took a vacation. A week ago Monday, the S&P 500 index ticked up 0.3 percent - and that turned out to be the biggest move of the week. There were three days when it moved less than 0.1 percent.

One factor was the very low volume, which suggests that brokers had already begun their summer vacations. On an average day, about 6.3 billion shares are traded, but the trend was lower than that all week, dropping to 4.9 billion shares by Friday.

The sleepiness of this stock market is a fairly recent trend; prior to last week, the S&P had actually been pretty volatile. There have already been 15 days when the S&P has moved by more than 1 percent this year, compared with 19 for all of last year.

Thoughts for Memorial Day

“Better to die fighting for freedom than be a prisoner all the days of your life.” ~ Bob Marley

“The greatest glory of a free-born people is to transmit that freedom to their children.” ~ William Harvard

 “Courage is contagious. When a brave man takes a stand, the spines of others are stiffened.” ~ Billy Graham

April's Inflation - or Deflation - Report

For the past 12 months, the Consumer Price Index in the U.S. has actually dropped by 0.2 percent, according to the figures released by the Labor Department this morning. CPI actually notched upward by 0.1 percent in April, but that wasn’t enough to prevent the largest year-over-year decline since October 2009.

Core CPI, which includes the more volatile food and energy costs, is moving upward, although not in any great dramatic fashion. That measure increased by 0.3 percent in April and is up 1.8 percent over the past 12 months.

Gas prices dropped by 1.7 percent in April, while food prices were unchanged. The aspect of consumer spending that increased the most was the medical care index, which rose by 0.7 percent, its largest monthly increase since January 2007. Prices of household furnishings and used cars also rose; prices of airline fares and apparel dropped.

The Fed Makes It (Almost) Official

At the beginning of this year, the smart money said that the Federal Reserve was likely to finally raise interest rates at its meeting in June. But events this year have made that possibility more and more remote, and the minutes of the Fed's April meeting, released yesterday, made it almost official:  Federal Reserve officials don't expect to raise rates at their next meeting in June

The good news is that the Fed doesn't expect  the first-quarter economic slowdown to last. They blamed the weak quarter on the weather and noticed the recent pattern of subpar first quarters. They did also say they were surprised that the drop in gas prices hadn't resulted in a splurge of consumer spending.

The Fed expects the economy to return to a “moderate pace” of growth in the second quarter, although the economic signals have been mixed. Since the meeting, payrolls figures have improved, while weaker-than-forecast data on manufacturing and retail sales prompted some economists to tamp down their second-quarter expectations.

The Sleepy Dow

Yesterday was a pretty quiet day on Wall Street, with the Dow Jones industrial average rising by a barely perceptible 0.07 percent. That came after a 0.14 percent increase on Monday and a 0.11 percent increase on Friday. It's hard to get much sleepier than that.

The Dow hadn't had three straight days of increases of less than 0.2 percent in a year and a half, since the week of Thanksgiving 2013. During the three days before Turkey Day, the Dow was even quieter, rising 0.05 percent, 0.002 percent, and 0.15 percent, but that week is generally a low-volume time of the year for the markets.

Looking back to last week, the Dow was up a more robust 1.1 percent on Thursday. Believe it or not, this marks the first four-day winning streak for the Dow since way back in February. 

A Good News/Bad News Earnings Season

As we're grinding to the end of this quarter's earnings season, the results are kind of mixed. With reports in from 92 percent of the companies in the S&P 500, earnings per share are up just 2.1 percent from a year earlier. Even more troubling is that analyst forecasts show S&P earnings rising just 1.4 percent for the full year, which would be the worst year since the recession ended in 2009.

But the markets don't seem exceptionally nervous; the S&P 500 closed at another new record just this past Friday. One big reason for optimism is that the two primary problems affecting first-quarter earnings, low oil prices and the high dollar, have reversed course so far in the second quarter.

Crude-oil futures are up 37 percent from their 2015 low; that might not be so good for drivers, but it's great news for energy stocks. The dollar has fallen 8 percent against the euro from its March high, which is great news for exporters. All told, we might see earnings bounce back some in the second quarter.

Jet-Propelled Savings

The fluctuations in oil prices continue to have repercussions in far corners of the economy. Here's another one: Airlines are spending a lot less on jet fuel than they did a year ago. Southwest Airlines reports that it spent an average of $2 per gallon of jet fuel in the first quarter of 2015 - down from $3.08 per gallon in the first quarter of 2014.

What's happening to all those savings? They're going to shareholders. Southwest announced last week it was buying back $1.5 billion of its own stock and increasing its dividend. Delta Air Lines also announced it was planning to buy back a whopping $5 billion in stock.

Altogether, the airlines are projected to reap a $7 billion windfall in lower fuel costs over the first six months of this year. Credit Suisse expects about 70 percent of that to find its way back to shareholders.

Dark Clouds in the Economy

There was a troubling sign for the economy in figures released yesterday: Retail sales were virtually flat in April, with no growth shown. Households appear to be paying down debt and building up bank accounts rather than making retail purchases. The nation’s personal saving rate in the first quarter of the year was the highest since the end of 2012.


Given that April is the first month of the second quarter, that report had reverberations. J.P. Morgan Chase economists lowered their second-quarter estimate to 2 percent growth from its earlier 2.5 percent after the retail figures were released. Morgan Stanley's second quarter estimate for GDP growth is just 1.5 percent.

Compounding the issue is the fact that first quarter GDP, first estimated at 0.2 percent, is now expected to drop with additional data that has been released. In fact, it seems likely that the economy contracted in the first quarter. The Commerce Department releases its next estimate of first quarter GDP on May 29.

The Top-Paying College Majors

If you have a child graduating from college this spring, you may be wondering how they're going to pay back all those student loans. Here's the latest list of the most lucrative majors in terms of starting salary,  based on data collected by PayScale.com from 1,000 U.S. universities:

1.  Petroleum Engineering Starting salary: $102,300
2.  Chemical Engineering Starting salary: $69,600
3.  Computer Engineering Starting salary: $67,300
4.  Nuclear Engineering Starting salary: $67,000
5.  Computer Science &  Engineering Starting salary: $66,700
6.  Electrical & Computer Engineering Starting salary: $66,500
7.  Electrical Engineering Starting salary: $65,900
8.  Aerospace Engineering Starting salary: $64,700
9.  Electronics & Communications Engineering Starting salary: $64,100
10.  Materials Science & Engineering Starting salary: $64,000

Small Business Is Spending Again

Despite some hiccups in the larger economy, small business owners are growing increasingly positive about the future. The National Federation of Independent Business said on Tuesday that its Small Business Optimism Index rose 1.7 points in April, the index's largest gain since December.

Perhaps even more positive was the fact that these business are spending money.  Of the 1,500 firms surveyed, 60 percent reported capital outlays, a post-recession high. Of those making expenditures, 44 percent said they had bought new equipment, and 26 percent planned capital outlays in the next three to six months.

Nine of the 10 components in the NFIB index rose last month. The only one that didn't is a bit of a surprise, considering all the optimism: Sales showed the only decline.

Beating the Earnings Recession

A month ago, we talked about the possibility of an earnings recession, in which the aggregate earnings for the S&P 500 would have fallen for an entire calendar year. Now that possibility looks a bit more remote. According to FactSet, earnings growth for the first quarter of this year looks like it will come in positive, although just barely, at growth of 0.1 percent.

Earnings growth now looks positive for the first time since January. The reason is that companies are reporting earnings above the analysts' estimates for the first quarter at a lofty 6.4 percent, much higher than expected.

The five-year average  for beating earnings is 5.4 percent. If that 6.4 percent earnings-beating figure holds up for the entirety of the first quarter, it will mark the highest surprise percentage for a quarter since the first quarter of 2011, when it was an even 7.0 percent.

April Is the Cruelest Month for Small Caps

April turned out to be a fairly decent  month for the S&P 500. The large-cap index rose by just 0.85 percent, which may not sound like a lot, but if we could keep up that pace every month, we'd be looking at a 10 percent annual growth rate.

But it was a bad month for small-cap stocks, as measured by the benchmark Russell 2000, which fell by 2.6 percent. This was the second consecutive miserable April for small caps; last year at this time, the Russell 2000 dropped by 3.9 percent.

Coincidence? Maybe, but there is a possible explanation.  The first quarter of 2014, like this year's first quarter, was very disappointing from a GDP standpoint, and there's a theory that the strength of the economy has a disproportionate effect on smaller stocks.

April's Jobs Report

April's employment report was a big bounceback from the disappointing March numbers, with the economy adding 223,000 jobs last month. The rebound from the previous month was even bigger than expected, since the Bureau of Labor Statistics also revised the March number downward from 126,000 to just 85,000.

The headline unemployment rate dropped slightly to 5.4 percent. That number is now at its lowest point since May 2008. April marked the 55th straight month of employment gains in the U.S.

In retrospect, March was the worst month for jobs since June 2012. The strong numbers for April have given hope that the economy simply stumbled in the first quarter, when in addition to that drop in the jobs numbers, overall GDP rose by an anemic 0.2 percent.

The World of the Living Inheritance

There's a definite new trend going on in the world of retirement savings: "living inheritance." This is when retirees are required to provide support to another person. A new report by HSBC says that 43 percent of all retirees said they were helping a family member or younger person out financially.

That's not much different from the percentages among pre-retirees. Among those who are still working, 62 percent said they provide regular support to another person.

But there are significant numbers of people who don't mind this. Almost a quarter of workers said they would rather spend or give away all their assets while they’re still alive rather than pass it on as part of an inheritance. Another quarter said they worry about not being able to support their loved ones financially.

A Nation of Renters

We are becoming a nation of renters: According to RealtyTrac's latest Cash, Investor & Distressed Sales Report, owner-occupant buyers accounted for just 63.2 percent of all residential single family home and condo sales in the first quarter of 2015. That's down from 65.8 percent in the fourth quarter of 2014, and 68.6 percent a year ago.

Meanwhile non-owner-occupant buyers - cleverly defined as a buyer who purchased a property but has their property tax bill mailed somewhere else - reached a new high of 36.8 percent in the first quarter of 2015, the highest level for that figure since the first quarter of 2011. Some 44.7 percent of all non-owner-occupied purchases went to all-cash buyers, down from 61.0 percent a year ago.

The U.S. Census is also reporting that the homeownership rate in the first quarter of 2015 fell to 63.7 percent, the lowest since 1990. Whether it's fallout from the recession and the housing crisis, or simply Americans not wanting to put down roots, it's clear that buying a house to live in is in a downward trend.

Sell in May? Don't Bother

The old adage "sell in May and go away" has just come into effect - signifying that the worst months historically for the stock market have been May through October. But like most old adages, this one is a little overblown. The summer months are the worst months for stocks, but they won't kill your portfolio.

The advantage is real: From 1929 through the end of 2014, the S&P 500 index returned an average of 7.1 percent from November through April but just 3.9 percent from May through October, according to Morningstar. It's even more pronounced for small caps, which have returned 10.5 percent in the winter months since 2002, but just 2.0 percent in the summer.

But it's hardly worth dealing with. According to MarketWatch, if you had simply employed a buy-and-hold strategy on the broad-based Wilshire 5000 index since June 2002, you would have earned an average annual return of 7.7 percent. If you had sold all your holdings each May, bought T-bills, then bought back the stocks at the end of October, you would have bumped that return all the way up to 7.9 percent.

Truckin'

Here's another little piece of fallout from the drop in gas prices: General Motors said the average price paid for one of its vehicles in April reached $34,750, up $880 from the year earlier. GM’s upscale GMC Denali truck and SUV lineup represented nearly a quarter of the brand’s sales in April, a record high. Pickups and SUVs are generally far more profitable for the industry than passenger cars.

Gas prices are still down by more than a dollar a gallon from a year ago, making it easier to fill up the tank on one of those bigger vehicles. That class of vehicle notched 54 percent of April U.S. sales, three percentage points higher than a year ago.
 
On top of that, the automakers have been focusing on giving them better fuel economy. Light trucks are now averaging 21.7 miles per gallon, a 13 percent improvement over 2010, according to researcher WardsAuto.com. The most-efficient version of Ford’s Explorer SUV now gets 28 mpg on the highway, compared with the 21 mpg for the Explorer of 2005.

Inflation Keeps Puttering Along

Inflation continues to be running at barely noticeable levels. The personal consumption expenditures price index, the Fed’s preferred inflation gauge, rose just 0.3 percent in March from a year earlier, the Commerce Department said yesterday. That's the same rate of increase that we saw in February as well.

Other measures looked a bit higher, but not extraordinarily so. Excluding the volatile food and energy categories, prices climbed 1.3 percent in March from a year earlier, the fourth consecutive month at that rate.

This has been going on for a really long time now. March was the 35th consecutive month that inflation has undershot the Fed’s stated inflation goal of 2 percent. We haven't had a month with the personal consumption expenditures index above 2 percent since May 2012.