The week ahead should be an important one for economic data, earnings numbers, and the recently revived stock market rally.
On the economy, new-home sales numbers should confirm the modest improvement seen in other housing data for June. However, other numbers in the middle of the week could disappoint. Consumer confidence could well have slipped in June even as economists feel better about the outlook. Consumer confidence is impacted by unemployment more than anything else and unemployment is rising. Moreover, confidence may have been boosted by the election of a new President in November, and a fading honeymoon, as is evident in his poll numbers, could also trigger a consumer confidence relapse. Durable goods orders could give back some of May’s stronger-than- expected gains while unemployment claims may have risen in the latest week as seasonal adjustments turn less favorable.
However, the big economic numbers are due out on Friday. The second quarter GDP number looks likely to come in negative, but only just, at a projected -0.1%, which would be a significant improvement from the -6.3% and -5.5% in the fourth and first quarters respectively. Also notable, in this report will be revisions to history going back a number of years which could potentially change the shape of the recession thus far.
What shouldn’t change, however, is the perception that the economy is very close to growth with GDP being restrained only by continued very sharp inventory reductions. In addition, a close to flat GDP number for the second quarter, combined with very low wage growth (which should be confirmed in the ECI report due out at the same time), suggests that corporations have been very adept at increasing productivity and controlling wages over the recession, a harbinger of much better profit growth over the next few quarters.
Finally, on second-quarter earnings reports, with more than half the capitalized value of the S&P500 now reporting, it still appears that earnings will come in between $14 and $15 for the quarter. This would be down mid-teens from the second quarter of 2008 but up from $10 in 2009Q1 and $0 in 2008Q4. It should be noted that the average firm in the S&P500 has seen a more severe year-over-year decline but the change in the composition of the index over the past year has been highly favorable. Another 144 S&P500 companies report this week, so by Friday, the second quarter picture should be mostly complete.
For the stock market, last week was another very positive one, with the S&P500 posting a 4.1% gain to add to the 7.0% increase seen the week before. This continues a general “recovery trade” pattern which includes rising Treasury yields and commodity prices, falling credit spreads and expected volatility, accompanied by a long slow drift down in the dollar. Small misses either way on economic or earnings numbers shouldn’t disrupt this trend, as markets still have a long way to go to get back to levels which seem appropriate for a world in which such misses, as opposed to liquidity issues and fears of global economic and financial meltdown, are the driving force behind market moves.
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