Edited by Vani Rao
US economic growth picks up after slow start
The year 2013 ended on a positive note, showing the resilience of the stock markets despite many challenges in the form of regulations, funding issues, and slackening government efforts to prop up economic growth. Continuing on the positive note, the US stock markets recorded modest gains as investors cheered better-than-expected earnings while anticipating a rebound in economic growth after the Fed announced key measures to tackle inflation and spur employment. However, the market faced major headwinds in the form of the Ukraine crisis, the harsh weather in the early part of 2014, and geopolitical tensions in Iraq. Despite these challenges, investors reversed the tepid market sentiment and regained their appetite for fast-growing, highly valued companies in the online retailing, media, and biotechnology industries.
As shown above, as on July 1, 2014, the S&P 500 Index climbed to 1,960.23, gaining 6.46% over the last six months. Reaching record levels over the past one month, the S&P 500 is now trading nearer to its 52-week high of 1,968.17. Within the S&P 500 Index, the Information Technology sector recorded the best returns so far during the year.
After witnessing a lag in March and April, the Nasdaq Composite Index regained momentum and led returns among the major indexes. The tech-heavy index climbed to 4,408.18 on July 1, 2014, gaining 6.11% over the last six months.
The Dow Jones Industrial Average rose to 16,826.60, on July 1, 2014, gaining 1.95% over the last six months.
Winners and Losers
Among the top gainers in the S&P 500 Index were Forest Laboratories Inc. (NYSE: FRX), which is going through with its merger with Actavis PLC (NYSE: ACT), and Newfield Exploration Co. (NYSE: NFX), which is currently riding the wave of high crude oil prices following the Iraq tensions.
On the downside, most of the top losers in the S&P 500 Index were in the retail industry, which reported weaker-than-expected results during the first quarter of FY2014. The industry seemed to be fighting more than just the harsh winter weather, as barring a few exceptions, most retailers did not offer positive guidance for Q2 and Q3 quarters as well. The Q1 earnings season witnessed anemic growth and a continuation of the negative guidance that has become a recurring theme every quarter for more than a year now. Bed Bath & Beyond Inc. (NASDAQ: BBBY), Best Buy Co. Inc. (NYSE: BBY), and Staples Inc. (NASDAQ: SPLS) were the major underperformers due to lower sales as shopper stayed indoors battling frigid weather.
While the US stock markets are on a rise, one wonders if this is due to the Fed’s policies that are aimed at tackling inflation and employment, or other macroeconomic factors like the rising household spending and an improving job market, or better weather conditions that is spurring manufacturing activity. Indeed, over the last six months the stock markets are seen to get a fillip from the Fed’s policies. However, inflation seems to raising its head again, and if not tackled now, could wipe out all gains that the market has seen so far. Economists believe that is definitely not a bubble and that the stock markets reflect the green shoots of the US economy.
Macroeconomic Factors Spurring Growth
World Bank Trims Global GDP Forecasts
On June 11, 2014, the US equity markets shunned gains after the World Bank’s dimmed global economic outlook. The bank trimmed down its global economic growth forecasts to 2.8% for 2014 from its January estimate of 3.2%, keeping in view the after effects of the harsh US weather and geo-political crisis in Ukraine. In addition, the bank also lowered its growth projections for developing countries to 4.8% for the rest of 2014, down from its January estimate of 5.3%.
Following this, the Federal Open Market Committee (FOMC), at its meeting on June 17 and 18, 2014, trimmed its earlier optimistic growth forecasts while hinting that interest rates may increase sooner than expected. The FOMC said that it will reduce the pace of its monthly bond buying by another $10 billion to $35 billion in July, including purchases of mortgage-backed securities and long-term Treasury bonds. The Fed has been reducing its asset purchases by $10 billion in every FOMC meeting since December, as per which the tapering should end by December 2014.
The FOMC also slashed its FY2014 GDP projections to between 2.1% and 2.3% from the earlier 2.9%, keeping with the slowdown in Q1 after a severe winter pulled to a halt activity in major parts of the country. Fed Chair Janet Yellen stated that despite a steadily improving job market and signs of inflation, the Fed sees no need to raise short-term interest rates from record lows anytime soon. She also kept faith in the economic recovery in the coming quarters mainly due to the resilient household spending and an improving job market.
Fed’s Measures to Tackle Inflation and Unemployment
Data from the US Bureau of Labor Statistics shows that the consumer price index had risen 2.1% in the past year. Despite the 1% drop in real GDP in the first quarter, key economic data now shows that the US economy is growing at a steady rate and slightly above expectations.
With unemployment rates dipping in the early part of the year, the Fed is looking to increase investor confidence through long-term measures that are aimed at shoring up employment data. According to the US Labor Department, non-farm payrolls increased 217,000 last month, in line with market expectations. Data for March and April was revised downwards to show 6,000 fewer jobs created than previously reported. Initial claims dipped to 312,000 in June from 345,000 in May 2014, while unemployment rates declined to 6.67%.
US Consumer Sentiment Rises in June
Noteworthy is the fact that despite strong headwinds, consumer confidence rose in June as consumers remained optimistic that the sluggish Q1 was due to difficult winter conditions, a survey released showed. The Thomson Reuters/University of Michigan’s final June reading of the Consumer Sentiment Index came in at 82.5, up from 81.9 in May.
Outlook for remaining quarters
A supportive Federal Reserve stance and a dip in unemployment figures are expected to make way for stronger US growth this year. The unemployment rate is seen steady at 6.3%. Moreover, with the private economy poised to accelerate, modest job gains and average earnings are expected to propel consumer spending over the next few months. In addition, the US Labor Department is expected to report next week that non-farm payrolls increased 210,000 in June, the fifth consecutive month of job gains above 200,000. All these factors bode well for better GDP growth in the coming months.