Established in 1957, the S&P 500, also known as the Standard and Poor’s 500 Index, is a capitalization-weighted index of 500 large-cap common stocks. Capitalization-weighted means that the companies with largest stock market capitalization have the greatest impact on the value of the index. The S&P 500 is the second most widely followed stock market index in America after the Dow Jones Industrial Average.
A healthy housing market is essential to economic growth in the U.S. economy. But despite what we are hearing from the media, the housing market rebound is facing major headwinds.
To start with, home prices in the U.S. housing market are nowhere close to their pre-crash levels. There are millions of homeowners in the U.S. economy whose homes are worth less than what they originally paid for them. From their peak in 2006, home prices in the U.S. housing market are still down roughly 30%. For millions of homeowners to break even on their home investment, home prices will have to go up by at least 40%.
We just learned housing starts plunged 16.5% in April from March. (Source: U.S. Census Bureau, May 16, 2013.) This decline in new housing starts was one of the sharpest declines since mid-2011.
The chart below depicts housing starts from 2001 to today. Notice the recent sharp decline in housing starts.
Chart courtesy of www.StockCharts.com
Housing starts may not be a very exciting number to some, but I follow housing starts to gauge consumer spending. Think of it this way: when a family buys a new home they need to buy things that are needed in the household—new furniture, appliances, lawn mowers, and so on. It is this spending that ultimately results in economic growth for the U.S. economy.
Construction spending in the U.S. economy is also on the decline. It registered an annual rate of $893.6 billion in December of 2012, and by March 2012, construction spending fell to an annual rate of $856.7 billion—a decline of four percent. (Source: Federal Reserve Bank … Read More
Conglomerate General Electric Company (NYSE/GE) said, “We planned for Europe to be similar to 2012, down again, but it was even weaker than we had expected.” (Source: “Earnings Insight,” FactSet, May 17, 2013.) General Electric (GE) reported corporate earnings of $0.34 per share in the first quarter, with sales in its industrial businesses declining 5.7% and profit falling 11%. (Source: MarketWatch, April 19, 2013.)
McDonalds Corporation (NYSE/MCD), in announcing its first-quarter results, stated, “For the quarter, Europe’s results were dampened by ongoing economic uncertainty.” (Source: Ibid.)
When talking about the eurozone, the chief executive of Whirlpool Corporation (NYSE/WHR), Jeff Fettig, said, “…demand is not recovering so far.” He added that Whirlpool’s sales were unchanged this year in Europe, and he warned that if the demand continues to slide, Whirlpool will have to make more changes to cut costs. (Source: “Companies Feel Pinch on Sales in Europe,” Wall Street Journal, April 28, 2013.)
GE, McDonalds, and Whirlpool are not the only companies in the key stock indices suffering from troubles in the eurozone. Big-cap companies like International Business Machines Corporation (NYSE/IBM), United Technologies Corporation (NYSE/UTX), and Xerox Corporation (NYSE/XRX) have also shown concerns in their first-quarter corporate earnings due to bleak demand in the eurozone.
What’s ahead for the eurozone? The strongest nations in the region, such as Germany and France, are struggling to keep up. France is in a recession, while the German economy showed very little change … Read More
The fact is that Japan is finally beginning to see some results from Prime Minister Shinzo Abe’s aggressive strategy to inject $2.4 trillion into the Japanese economy over the next decade.
Maybe this time it’s for real. Previous attempts to drive Japan’s economy out of its economic tailspin have failed. Of course, it will take some time, and success will depend on the continued weakness of the yen and a pickup in the global economy, especially with the country’s key trading partners in China.
If the first quarter was any indication, the despair in Japan may be finally coming to an end after decades of disappointment; but again, it’s only one quarter.
Japan saw its gross domestic product (GDP) surge 0.9% in the first quarter or an annualized rate of 3.5%, according to data from Japan’s Cabinet Office. (Source: “Japan GDP Rises 0.9% On Quarter In Q1,” RTTNews, May 15, 2103.)
What’s also interesting is the rise in private consumption in Japan, which contributed to 2.3% of the 3.5% GDP growth. The upward move in consumer spending is critical, as a large part of the economic renewal in Japan will be dependent on consumer spending as is the case in the United States. According to Trading Economics, consumer spending accounted for about 60% of GDP in Japan, so it’s essential.
While it’s still way too early to see if Japan is on the path to growth, the country’s … Read More
After several summers as a teenager working in golf course construction, I can tell you that building a golf course requires a lot of planning.
The crew I worked with would go into an existing golf course and rebuild an entire hole. Or a green that wasn’t draining properly.
The problem—and the most delicate part of this endeavor—was to be careful not to wreck all the services that were buried in the ground. These included irrigation, drainage, telecom, and power lines.
While operating a Case backhoe, I cut through a large electrical line that was missed by the locate crew.
Needless to say, you reevaluate your priorities pretty quickly when something like this happens. An enormous flame shot up out of the ground.
Case Corporation doesn’t trade on the stock market. It is now part of a company called CNH Global N.V. (NYSE/CNH) out of the Netherlands, Fiat Industrial S.p.A being its majority owner.
On the stock market, Caterpillar Inc. (NYSE/CAT) is one of the largest players in heavy equipment. The company was doing really well a few years ago when the construction boom in Asia combined with the mining boom to produce significant growth.
The position is down from its previous stock market high, but the company is not expensively priced.
With a current price-to-earnings ratio of around 12, the position boasts a current dividend yield of 2.3%. If it was over three percent, then Caterpillar would be a much more attractive stock market … Read More
The disconnect between the stock market and the U.S.economy continues to grow, as the key stock indices run way ahead of reality.
The fundamental reasons behind the rise in today’s key stock indices are missing. For a real rally to happen, there has to be rising demand in the U.S. economy, consumers must be confident to spend, and businesses should see their sales rising. None of this is taking place.
Industrial production in the U.S. economy decreased 0.5% in April—marking the second decline since the beginning of the year. (Source: Federal Reserve, May 15, 2013.)
Similarly, manufacturing in the U.S. economy is also portraying a bleak picture of demand. Manufacturing output in the U.S. economy declined 0.4% in April after continuing its slump from March, when it decreased by 0.3%.
In the first quarter, a large number of companies on the key stock indices, like the S&P 500, were able to show better-than-expected corporate earnings. But in hindsight, they showed one troubling phenomenon: as the majority of the companies on the S&P 500 have already reported their corporate earnings, only 48% of them were able to beat revenue expectations. (Source: FactSet, May 10, 2013.)
Looking ahead, the picture for the key stock indices in the U.S. economy doesn’t look bright. For example, as of May 10, out of all the companies on the S&P 500 that have issued their corporate earnings guidance, more than 79% of them have issued a negative outlook. The estimated earnings growth rate for companies on the S&P 500 stands at 1.6%, compared to 4.5% near the end of March.
On top of all these troubles … Read More
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