Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

GDP

GDP is the abbreviation for “Gross Domestic Product,” the market value of all the goods and services produced by a country in a given year. It includes all the expenditures of citizens, investors and government, and the value of all exports less imports, in a year.

Strategies for Investing in These Chaotic Markets

By for Profit Confidential

Strategies for Investing

Here we go again. Just when the stock market is moving lower and forecasting a potential correction, we see buying emerging, driving the bears back to the woods.

The reality is that I was looking for the S&P 500 to potentially correct 10%, down to around 1,792, something that has not materialized in about two years. It would, in my view, represent a good buying opportunity to accumulate shares at a discount. Yet despite declining as much as seven percent, the S&P 500 just couldn’t give up, staging a bounce-back.

So here we are with the S&P 500 breaking back above its key 200-day moving average (MA) of around 1,906. This appears to be encouraging the market, making it somewhat optimistic.

The way I see it is the recovery of the 200-day MA by the S&P 500 was key, but I would be more impressed if the S&P 500 could retrace the 50-day MA of around 1,966. Of course, this move could easily occur, as the S&P 500 was a mere 20 points away on Wednesday.

What’s also interesting is the comeback in both the technology and small-cap areas.

Technology has been strong over the past several sessions with the NASDAQ bouncing back to above its 200-day MA and coming within 1.49% of its recent high. If technology can regain its luster and offer some leadership to the broader stock market, we could see the S&P 500 move back to above 1,700 in the best-case scenario; albeit, it will take some work for this to happen.

Small-caps have fared the best in October, largely due to some technically oversold buying … Read More

Top Growth Areas Heading into 2015

By for Profit Confidential

Growth Areas Heading into 2015The stock market is clearly struggling to stay afloat at this juncture, balancing the domestic economic renewal with the global risk coming from ISIS, Russia, the eurozone, and economic stalling in China.

A major catalyst or a reason to buy is what investors are searching for. The focus later next week will shift to the third-quarter earnings season, which is carefully monitored by investors.

The start of the third-quarter earnings season will officially begin with Alcoa Inc. (NYSE/AA) reporting next Wednesday. Alcoa is a decent barometer of the global economy. The company reported an excellent second-quarter earnings season, albeit the quarter was relatively average.

All eyes will focus not only on the ability of CEOs to control the expense side to drive revenues, but also on the actual revenue growth. The strong second-quarter gross domestic product (GDP) growth will help.

For the third-quarter earnings season, the earnings growth is estimated at 4.7%, well down from a much higher 8.9% as of June 30, according to a report from FactSet. (Source: “Earnings Insight: S&P 500,” FactSet web site, September 26, 2014.)

Worse yet, the report suggests that nine of the 10 sectors have reduced their earnings season expectations. This is not supportive of the recent record moves by the DOW and S&P 500.

Only the healthcare sector appears to have increased its expected earnings growth, bumping it up to 10.6% for the third-quarter earnings season, up from 9.4% as of June 30. Investors could consider buying an exchange-traded fund (ETF) to benefit, such as the SPDR S&P Health Care Equipment ETF (NYSEArca/XHE). On the small-cap stocks side, a healthcare ETF to … Read More

Two Important Economic Signals to Share with My Readers This Morning

By for Profit Confidential

U.S. Consumer Confidence CollapsingA good gauge for me on how consumers in the U.S. economy are faring has always been the statistics coming out of Wal-Mart.

Wal-Mart Stores Inc. (NYSE/WMT) reported its operating income in its second quarter (ended July 31, 2014) declined by 2.4%. Its subsidiary, Sam’s Club (wholesale store), saw its operating income, after taking out fuel, decline by 10.2%. (Source: Wal-Mart Stores Inc., August 14, 2014.)

For its entire 2015 fiscal year, Wal-Mart now expects to earn in the range of $4.90 to $5.15 per share compared to its previous estimate of $5.10 to $5.45 per share.

The performance of Wal-Mart is very important to economists like me because the massive reach of Wal-Mart is a good indicator of consumer spending. Wal-Mart is the biggest private employer in the world, with a staff of approximately two million, and the largest retailer in the world. More than one hundred million people visit a Wal-Mart store weekly.

So when Wal-Mart comes out with soft earnings, it gives me a reason to be concerned about the direction of consumer spending. But that’s not the only thing I’m worried about in respect to the economy.

According to FactSet, of those major public retailers that have reported their second-quarter same-store sales, 46.8% of them have reported sales below estimates.

Retail sales are stagnant for the simple fact that consumer spending is getting very soft here in the fifth year of the so-called economic “recovery.”

Below is a chart of the widely followed University of Michigan Consumer Sentiment Index.

University of Michigan Consumer Sentiment Chart

Chart courtesy of www.StockCharts.com

As you can see, consumer sentiment has tumbled to its lowest level in … Read More

Stock Market Fake? Economic Growth Falls to Slowest Pace Since 2009

By for Profit Confidential

Eurozone Economic Growth PrecariousNot too long ago, I reported that Italy, the third-biggest economy in the eurozone, had fallen back into recession.

Now Germany’s economy is pulling back. In the second quarter of 2014, the largest economy in the eurozone witnessed a decline in its gross domestic product (GDP)—the first decline in Germany’s GDP since the first quarter of 2013. (Source: Destatis, August 14, 2014.)

And more difficult times could lie ahead…

In August, the ZEW Indicator of Economic Sentiment, a survey that asks analysts and investors where the German economy will go, posted a massive decline. The index collapsed 18.5 points to sit at 8.6 points. This indicator has been declining for eight consecutive months and now sits at its lowest level since December of 2012. (Source: ZEW, August 12, 2014.)

Not only does the ZEW indicator provide an idea about the business cycle in Germany, it also gives us an idea of where the eurozone will go, since Germany is the biggest economic hub in the region.

But there’s more…

France, the second-biggest economy in the eurozone, is also in a precarious position—and a recession may not be too far away for France.

After seeing its GDP grow by only 0.4% in 2013, France’s GDP came in at zero for the first two quarters of 2014. (Source: France’s National Institute of Statistics and Economic Studies, August 14, 2014.)

France’s problems don’t end there. This major eurozone country is experiencing rampant unemployment, which has remained elevated for a very long time.

While I understand North Americans may not be interested in knowing much about the economic slowdown in the eurozone, we must … Read More

If the Economy Is Improving, Why Are Investors Pricing in a Slowdown?

By for Profit Confidential

U.S. Economy Slowing Down Here in 2014The Bureau of Economic Analysis (BEA) surprised even the most optimistic of economists when it reported the U.S. economy grew at an annual rate of four percent in the second quarter of 2014.

On the surface, the number—four percent growth—sounds great. But how serious should we take that gross domestic product (GDP) figure?

Firstly, I’d like to start by pointing out that the BEA often revises its GDP numbers downward. We saw this happen in the first quarter. First, we saw the BEA say the U.S. economy grew by 0.1% in the first quarter, then after a couple of revisions, they said the economy actually contracted 2.9% in the quarter.

I obviously expect the BEA to lower its initial second-quarter GDP numbers again.

But here’s what really worries me…

If the GDP data suggests the U.S. economy is growing, why are investors pricing in an economic slowdown?

The chart below is of the 10-year U.S. Treasury, the so-called safe haven. Back in 2007 to 2009, investors ran to U.S. Treasuries as a safe haven. As the U.S. economy improved, the yields on the 10-year U.S. Treasury started to rise as interest rates rose with general optimism towards the economy.

10 Year Treasury Note Yield Chart

Chart courtesy of www.StockCharts.com

But since the beginning of this year, yields on the 10-year U.S. notes have declined 18%. This is despite the fact the biggest buyer of these bonds, the Federal Reserve, has stepped away from buying these Treasuries as its quantitative easing program comes to an end.

At the same time, we have the stock market finally starting to give in. So if the stock market is a … Read More

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