The U.S. economy grew, sort of, at a miniscule annual rate of 0.1 percent in the first quarter, according to the Commerce Dept. This preliminary reading, the first of three, was far below pessimistic expectations. This underperformance has occurred several times since the on-again, off-again recovery officially began in June 2009.
No wonder U.S. government bond yields have declined this year, contrary to most expectations, with the 10-year Treasury going from 3 percent to as low as 2.6 percent.
The first quarter’s economic weakness was attributed primarily to a 7.6 percent decline in exports, partly because of economic weakness in Europe and Asia. Poor weather, a favorite excuse for everything that went wrong during the winter, probably played a part in the export slump.
Also noteworthy, however: Business spending on equipment fell at a 5.5 percent annual pace in the first three months of the year, the largest decline since 2009.
Regardless of the causes, the tepid (to be generous) GDP reading marks a continuation of the still-sluggish growth in the current five-year economic expansion.
The report came right before the Federal Reserve announced that it is continuing to reduce, or taper, its bond purchases to $45 billion a month, from the original $85 billion. The Fed says it’s starting to see faster growth after the harsh winter.
The Fed also maintained its guidance on short-term interest rates, saying they would remain near zero for a “considerable time” after the bond-buying program ends later this year. The current expectation is that the Fed won’t start to raise interest rates until well into 2015.
However, evidence of a possible economic rebound came the next day, May 2. The federal government's jobs report for April showed a jump of 288,000, with a sharp decline in the official unemployment rate to 6.3 percent.
Meanwhile, corpor! ate profits continue to grow, albeit modestly. Earnings for the first quarter have been better than minimal expectations. They’ve helped to support the broad stock market during its turmoil when various high-flying stocks came back to earth.
As of now, the pop of the speculative bubble hasn’t spread significantly into the broad market. The Standard & Poor’s 500 ended April only slightly below its all-time closing high. The benchmark is up 1.9 percent this year. Some might be disappointed after 2013′s 30 percent rise. But we view it as part of a desirable consolidation period after a big advance that started in 2012.
Also this week, the Dow Jones Industrial Average, which has been the laggard among the major stock-market indices, finally caught up with the others, which hit new all-time highs earlier this year. The Dow closed in record territory for the first time in 2014.
The Dow has trailed this year mostly because of how its 30-stock index is calculated. The S&P 500 is weighted by the market capitalization of its 500 components. In sharp contrast, the Dow is a price-weighted index. So the stocks with the highest share price have the greatest weight.
While this may have been appropriate in the Dow’s early days, it makes no sense now. In other words, the Dow is increasingly disconnected from the broad market. But here’s the additional, bigger twist to the story:
In September 2013, as part of its periodic housecleaning, the Dow decision-makers dropped three stocks from the DJIA. All were depressed, low-priced issues: Alcoa (NYSE: A), Bank of America (NYSE: BAC) and Hewlett-Packard (NYSE: HPQ). Together, they then accounted for only 3 percent of the total DJIA average.
Two of the additions were Visa (NYSE: V) and Goldman Sachs (NYSE: GS), which then assumed second and third places in price, after International Business Machines (NYSE: IBM). The third addition was the relatively high-priced Nike (NYSE: NKE). So all three ! new compo! nents together got a disproportionate influence in the Dow, particularly compared with the trio they replaced.
The Dow’s selection committee has been frequently criticized in the past for “buying high and selling low.” That characterization looks increasingly accurate. In the first four months of 2014, these were the three biggest Dow losers: Goldman Sachs, down 10 percent; Visa, off 9 percent; and Nike, a 7 percent decline.
The Dow is easy to follow. But it’s becoming increasingly irrelevant.
# # #
No comments:
Post a Comment