MarketView for February 28

 

 

Summary

 

The S&P 500 ended at another record close on Friday but well off the day's highs as worries the Ukraine resulted in some profit-taking ahead of the weekend. Nonetheless, all three major indexes closed out the month with strong gains. The Dow scored its best monthly percentage gain since January 2013, while the S&P 500 had its best month since October.

 

The Nasdaq remained in negative territory for the session, and tech shares including Apple and Salesforce.com were among the day’s largest drags on the S&P 500. Salesforce.com was down 5.8 percent, closing at $62.37, a day after it raised its full-year revenue forecast. Unfortunately, its earnings forecast did not meet consensus estimates. Other business software makers also fell, including Workday, down 4.8 percent at $109.92, and Netsuite, down 3.8 percent at $115.09.

 

Early in the session, the S&P 500 hit an intraday record for a second time this week as consumer confidence and other data bucked the recent trend of weaker economic reports. However, the indexes turned negative after Ukraine's acting president accused Russia of open aggression and said Moscow was following a similar scenario to the one before it went to war with Georgia in 2008.

 

For the month, the Dow rose 4 percent, the S&P 500 was up 4.3 percent and the Nasdaq chalked up a 5 percent gain. For the week, the Dow was up 1.4 percent, the S&P 500 was up 1.3 percent and the Nasdaq was up 1 percent.

 

Strong gains this week have come from retailers, with the S&P 500 retail index chalking up 4.5 percent gain for the week following upbeat results from the likes of Home Depot.

 

Federal Reserve Chair Janet Yellen bolstered the market on Thursday when she said harsh weather seems to be to behind recent U.S. economic softness. Also helping the market was data showing consumer sentiment rose more than expected, while the Chicago Purchasing Managers Index was also ahead of expectations. However, the Commerce Department reduced its estimate for fourth-quarter economic growth.

 

Among Friday’s top performers was Monster Beverage, whose shares closed up 5 percent to $74 a day after reporting results.

 

About 7.7 billion shares changed hands on U.S. exchanges, above the 7 billion average this month, according to data from BATS Global Markets.

 

GDP Growth Cut

 

The Commerce Department released a report Friday morning in which the Department reduced its estimate for fourth-quarter growth as consumer spending and exports were less robust than initially thought, suggesting some loss of momentum heading into 2014.

 

Gross domestic product expanded at a 2.4 percent annual rate, the Department said on Friday. That was down sharply from the 3.2 percent pace reported last month and the 4.1 percent logged in the third quarter.

 

It is not unusual for the government to make sharp revisions to GDP numbers, as it does not have complete data when it makes its initial estimates. In fact, the latest figures will be subject to revisions next month as more information is received.

 

The revision left GDP just above the economy's potential growth trend of between a 2 to 2.3 percent. Even with the revision, the second-half growth was a rather good 3.3 percent and an increase from 1.8 percent in the first six months of the year.

 

Consumer spending accounted for a large percentage of the revision after retail sales in November and December came in weaker than assumed. Consumer spending was cut to a 2.6 percent rate, making it still the fastest pace since the first quarter of 2012. It had previously been reported to have grown at a 3.3 percent pace.

 

Consumer spending, which accounts for more than two-thirds of all domestic economic activity, contributed 1.73 percentage points to GDP growth, down from the previously reported 2.26 percentage points. As a result, final domestic demand was lowered two-tenths of a percentage point to a 1.2 percent rate.

 

The loss of momentum appears to have spilled over into in the first quarter of 2014, with an unusually cold winter weighing on retail sales, home building and sales, hiring and industrial production.

 

The Federal Reserve, which has been cutting back on the amount of money it injects into the economy through monthly bond purchases, views the recent soft patch as temporary. Fed Chair Janet Yellen told the Senate on Thursday that the cold weather had played a role in the weakening data. She said that it would take a, "significant change" to the economy's prospects for the Fed to suspend its plans to wind down its bond buying.

 

Despite the first quarter's weak start, economists remain optimistic that growth this year will be the strongest since the recession ended almost five years ago. For all of 2013, the economy grew 1.9 percent.

 

An uptick in inflation also accounted for the downgrading of GDP growth in the fourth quarter. A price index in the GDP report rose at a 1.0 percent rate, instead of the previously reported 0.7 percent rate. A core measure that strips out food and energy costs increased at a 1.3 percent rate, revised up from a 1.1 percent pace.

 

Trade weighed on fourth-quarter revisions as well, after a fall in exports in December resulted in a bigger trade deficit in the fourth quarter than the government had initially assumed. Trade's contribution to growth was lowered to 0.99 percentage point from 1.33 percentage points. It was still the largest contribution to GDP growth since late 2010.

 

Inventories, previously reported to have risen by $127.2 billion in the fourth quarter, were revised down to $117.4 billion. The rise in the stocks of unsold goods was still the largest since early 1998 and followed a gain of $115.7 billion in the third quarter of 2013.

 

The contribution to growth from inventories, which the government put at 0.42 percentage point a month ago, was revised down to only 0.14 percentage point. Excluding inventories, the economy grew at a 2.3 percent rate, revised down from a 2.5 percent pace.

 

Government spending was also revised down, but the impact was offset by upward revisions to investment in residential construction, nonresidential structures and business spending on equipment.

 

Consumer Sentiment Rises

 

The Thomson Reuters/University of Michigan's final reading on the overall index on consumer sentiment for February indicated that consumer sentiment rose marginally in February even as concerns about the extreme weather persisted, a survey released on Friday showed. According to the survey, the overall index came in at 81.6, slightly above the 81.2 indicated by both the preliminary February number and the final January reading.

 

"The most significant implication is not whether consumers have correctly assessed the weather's negative impact on the economy, but the resilience consumers have demonstrated in the face of the polar vortex as well as higher utility bills and minimal employment gains," survey director Richard Curtin said in a statement.

 

The survey's barometer of current economic conditions edged up to 95.4 from the 94.0 preliminary reading, which was also the median forecast. It was 96.8 in January. The gauge of consumer expectations was 72.7, slightly lower than the initial February reading of 73 but up from January's 71.2.

 

The survey's one-year inflation expectation ticked down to 3.2 percent from 3.3 percent in the preliminary release, while the five-to-10-year inflation outlook was unchanged from the preliminary at 2.9 percent.

 

Pending Home Sales Rise

 

Contracts to buy previously owned homes edged up in January after a weather-related hit at the end of last year, offering hope the housing recovery would get back on track. According to the National Association of Realtors, its pending home sales index, based on contracts signed last month, rose 0.1 percent to 95.0 in January. The increase followed a revised 5.8 percent December drop that had taken pending sales to their lowest level since November 2011.

 

"Ongoing disruptive weather patterns in much of the U.S. inhibited home shopping," Lawrence Yun, chief economist for the Realtors, said in a statement. "Limited inventory also is playing a role, especially in the West, while credit remains tight and affordability isn't as favorable as it was a year ago."

 

Chicago PMI Unexpectedly Higher

 

The February reading of Chicago Purchasing Managers Index (PMI) rose to 59.8, well above expectations of 56.4 (and up from 59.6 in January). The Chicago Business Barometer remained broadly unchanged at 59.8 in February compared with 59.6 in January, as a double-digit gain in Employment offset declines in New Orders, Production and Order Backlogs.

 

The Chicago Report points to firm growth and a continued recovery in the US economy, with the Barometer standing at its highest level since December and remaining around 60 for the fifth consecutive month.

 

The negative effect of the poor weather on business appeared to have a minor impact that was only visible in longer supplier lead times.

 

After expanding at a faster rate in January, Production and New Orders decelerated in February, while a more pronounced set back was seen in Order Backlogs.

 

In contrast, the Employment Indicator bounced back sharply in February, jumping out of contraction, and nearly reversing the declines seen in the previous two months.

 

Prices Paid fell in February, following January’s supplier led price hikes, which had pushed the indicator to the highest level since November 2012.

 

Inventory of finished goods expanded a little faster as companies continued to rebuild stocks, following December’s sharp drawdown.

 

Commenting on the MNI Chicago Report, Philip Uglow, Chief Economist at MNI Indicators said, “The latest Chicago Report confirms that the US economic recovery continued in February, with New Orders and Production remaining at high levels.”

 

“In line with the pick-up in demand, firms continued to rebuild inventory and just over 50% of respondents said they planned to increase stock levels over the next three months."