Stocks Indifferent to Lower-than-Expected GDP – July 27, 2014

Here’s the news of the week – and how we see it here at McAlvany Wealth Management:

Stocks Indifferent to Lower-than-Expected GDP

On the whole, this week tipped marginally in favor of the bears – but it certainly was not devoid of attempts to speculate with reckless abandon. First-quarter GDP growth was revised lower again, this time to -2.9%, (the largest decline in five years), led by reductions in consumer spending, healthcare, and exports. Of course, the news was treated as irrelevant by the bulls, and we suppose that was to be expected based on the weather conditions at the time. But the revised decline in GDP stands in stark contrast to data, such as incomes, spending, job growth, durable goods orders, etc., that were improving during the same period.

MWM 14, 6-27 Box ScoresThere certainly seem to be some inconsistencies with the data. If one could speculate, particularly with respect to the GDP figures, it would appear that an effort has been made to dump bad data in a quarter that has now been forgotten – causing future quarters to shine by comparison. That may give the Fed some breathing room with respect to tapering of its bond purchases – a policy that we suspect was designed to cool inflation and/or the stock market, neither of which has happened yet. Nonetheless, it appears that, despite the volatility in the data, the bulls are sticking with their story that the Fed is here to stay.

Perhaps acting as their enablers, existing home sales rose 4.9%, new home sales spiked higher by 18.5%, and capital goods orders rose 0.7% in the month of May. Nothing really impaired the bulls’ attempts to goose stocks higher in the week until a couple of Fed governors, namely Plosser and Bullard, warned that a hike in the Fed Funds target rate was in order sooner (January 2015) rather than later. But by Friday, and in thin trade once again, stocks were seen climbing into the close, perhaps in pursuit of a solid month-end finish and/or to protect mergers and acquisitions that have yet to be completed. Whatever the cause, U.S. markets are increasingly going it alone, as outside markets have softened in the face of rising geopolitical, fiscal (bad debt), and inflationary risks.

As for the precious metals, they seem to be getting the same message as stocks, albeit more slowly: The Fed is trapped. So far, stocks have received most of the attention in the face of that realization. However, as stocks overheat alongside rising inflation (vis-à-vis cost push, i.e., the falling dollar), a sizeable correction (given the leverage in use) is closer at hand than the consensus would care to admit. The dollar, by the way, has lost considerable ground in recent weeks, despite U.S. economic optimism, Fed tapering, and constant ECB jawboning in regard to bond purchases. With all of that in play, the stealth bull market in the precious metals that we believe is now underway stands an excellent chance of accelerating.

Best Regards,

David Burgess
VP Investment Management
MWM LLLP

2014-09-26T17:07:42+00:00