Economic Notes for the Week of February 27th

It was a fairly light week, as far as economic data was concerned.

Existing home sales increased in January by +4.3% to 4.57 million units, which was higher than forecast but was somewhat tempered by some adjustments to the December level, which muted the effect.  The median sales price of existing homes was unchanged (based on seasonal adjustments) and the year-over-year change was still negative at -2%.  The ‘months supply’ of homes’ has declined to the lowest level since spring 2006, at around 6.1 months.  This may be from a decrease in listings than a strong improvement in sales, however.

New home sales fell in January by -0.9% to a seasonally-adjusted rate of 321,000 after four straight months of gains.  This was somewhat tempered by upward revisions in the fourth quarter of last year.  Interestingly, in 2011, only 304,000 new homes were sold—the fewest on record since data began in 1963.  We’ve mentioned this before, but this level is far below that needed to keep up with replacements and demographic needs (think 3 times the current amount).  It seems to be more a matter of how long we trail along at this lower level.

Initial Jobless Claims were flat on the Feb. 18 week at 351,000, but the more relevant four-week moving average fell further to 359,000 (the lowest it’s been since March 2008).  While some disputed the initial stickiness of the numbers early on as well the magnitude of normal labor force size adjustments, the labor market continues to improve on many levels.  Continuing claims fell to 3.392 million (a drop of 52,000).

It may be a bit early to read too much into this, but there has been a historical precedent of upward pressure on rates and increased tendency toward monetary tightening when initial claims levels begin to fall below 350,000 consistently.  Right now, we’re right about the breakeven point, so stay tuned.  But, if this improvement continues—even at a moderate pace—the ‘2014’ target for Fed action may need to occur sooner, barring other factors.

Market Notes

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U.S. stocks were up another percent on the week, as equity assets continue to experience the benefits of improved economic numbers in the U.S. and decrease of debt tensions overseas.  From a sector standpoint, energy and technology were the best performing industries, while financials and consumer discretionary lagged.  Large-caps outperformed small-caps.  Developed market foreign stocks outperformed U.S. issues, mostly due to strong performance in France, Germany and several larger European nations.

As earnings season came to an end, the final tally of positive surprises ended up at 67%, which is down from 74% in Q3 and the four-quarter trailing average of 75%.  Revenue results were similarly lower.  All-in-all, this earnings season has been described as mediocre to decent—as earnings growth has decelerated, but remained soundly positive.  Macro issues have appeared to dominate so far in 2012.

U.S. bonds rose in price slightly for the week, while foreign bonds outperformed dramatically with a weaker dollar.

Commodities were the best performers of the week again as oil prices rose, as did a variety of industrial metals, silver and gold.  Oil prices have continued to rise, to $108 for WTI and $124 for Brent crude, as have gasoline prices (which hit closer to home for most on a day-to-day basis).  It is possible to blame some of this on foreign policy issues surrounding Iran, as well as seasonal refinery operations which have kept some supply from the downstream market.  When we discussed oil price factors with the chief energy economist of a major global bank some time ago, he speculated that as much as one-third of the price of a barrel of oil is based on geopolitical conditions.

Oil prices will likely continue to be a point of discussion if they continue to rise—as the shaky sentiment of the typical consumer is especially sensitive to potential pitfalls in the recovery even if the economy is on a stronger upward track.

Have a good week.

Karl Schroeder, RFC, CSA, CEP

Investment Advisor Representative

Schroeder Financial Services, Inc.


Sources:  FocusPoint Solutions, Barclays Capital, Bloomberg, Deutsche Bank, Goldman Sachs, JPMorgan Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Reuters, Standard & Poor’s, U.S. Federal Reserve, Wells Capital Management, Yahoo!.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.  Schroeder Financial, Inc. is a registered investment advisor.