US markets shrug off weak consumer figures

Yet again the markets inched forward as investor interest in the stock markets and economic data strengthened. Lower unemployment figures in the US last week offset weaker consumer confidence figures to leave trading early this week mixed as investors await the onslaught of earnings and economic data slated to be released. The US Dow Jones Industrial Index gained almost a 100 points over the week but in fact all this gain was realised on Friday. Trading for the first four days was slow and more down than up on average. The S&P 500 and NASDAQ indexes logged gains late in the week as well, with the NASDAQ leading the rise with a 22 point increase, or 1.3%. In other global markets, the Canadian TSX was the big winner for the week, gaining 2.5% to close at 7251. The UK FTSE also posted above average gains, logging an increase of 54 points for a 1.4% improvement over last week’s close. Big news for the week was the surprising initial jobless claims in the United States, which dropped to 386,000, its lowest level since February. The figure suggests that the improvements in the labour market are happening and of course, this will lead to more money in the hands of consumers, who account for 2/3’s of the country’s GDP. More jobs are seen as a cornerstone of sustainable economic recovery.

On the other hand, the big story earlier this week was the weak consumer confidence figures released for July. US Consumer Confidence fell to 76.6, down from June’s figure of 83.5 when most analysts’ were expecting an increase. The caution in spending by consumers may be temporary as it will take some time for the lower jobless figure to work and other government initiatives to work themselves into the economy. Alan Greenspan, in his recent positive statement to US Congress, had stated he expected the world’s powerhouse to grow at the equivalent of more than 3.5% for the rest of this year, accelerating to over 4% next year. With inflation staying below 2%, and some of the United States major trading partners still suffering from weak economies, there remains some uncertainty as to the strength and surety of the recovery. Demands have been soft, aggregate demand flagging and consumer caution visible and now clearly measured by the 76.6 July figure. We note that debt service costs for homes has declined and equity improved which should help bolster Consumer confidence as well. Not withstanding, the economy does seem to have some measure of resilience and as the politicians continue to say, is poised to move forward. Deflationary concerns now seem quite remote.

In the UK, retail sales rose 1.9% coming in ahead of economists’ predictions of 0.4%. The increase was significant but seems seasonal in that the government attributed the gains to warmer weather got shoppers out more purchasing outdoor related goods. The UK economy grew less than expected during the second quarter. GDP rose 0.3% in the quarter but analysts had projected 0.4%. In Japan, consumer confidence for the second quarter grew to 37.3 from 36.1 in June. As we have said before, a number below 50 means contraction, nevertheless, for Japan the increase was seen as a positive. In closing, there continues to be more good news from corporations on their balance sheets and earnings achievements. Improved confidence in the economy also seems to be the order of the day, which we expect will flow through to stock prices.

e-mail : darcy@investments-intl.com