The following is the weekly commentary of David Kelly, chief market strategist at JPMorgan Funds, for the week of July 19:
To paraphrase Procol Harum, for many observers, the economic recovery, which had looked a bit ghostly, just turned a whiter shade of pale.
Last week's numbers on retail sales, while in line with expectations for June, contained downward revisions for April and May, suggesting that consumer spending may only have grown by 2% annualized in the second quarter. In addition, a combination of lower-than-expected inventory accumulation and higher-than-expected imports in May will have further eroded estimates of second quarter GDP growth, which may now come in below 2% annualized in the numbers due out on July 30th.
Economic numbers this week will do little to restore color to the face of the recovery. Housing Starts, due out on Tuesday and Existing Home Sales, due out on Thursday, likely both fell again in June in a continued hang-over from the expiration of the home-buyer tax credit. Unemployment Claims may have ticked up in the latest week, although these numbers are still distorted by unusual seasonal patterns in automotive plant closings. Meanwhile, the Index of Leading Economic Indicators, also due out on Thursday, should show a mild decline, as growth in the money supply and a steep yield curve only offset some of the weakness eminating from the housing and manufacturing sectors.
Ben Bernanke will testify on Wednesday and Thursday to Senate and House committees, as the
Federal Reserve releases its mid-year Monetary Report to the Congress. His comments, and the report, will likely reflect the Fed's recent downgrade of its forecast for economic growth, while still stressing the likelihood of continued moderate expansion over the next few years. While wanting to be realistic, the Fed will not want to further undermine already fragile confidence.
On a brighter note, according to Zacks Equity Research, 129 S&P500 firms are slated to report second quarter earnings. The earnings season so far has been a positive one with 80% of firms beating analysts' expectations. This trend is likely to continue for the rest of this earnings season, and the current
Federal Reserve forecast of roughly 3.25% growth in real GDP in 2010 and 3.85% in 2011, should be sufficient for a continued solid rebound in earnings, as well as an eventual increase in both long-term and short-term interest rates.
The investing public, which is continuing to pull money out of stock funds and reallocate to bonds, does not appear to be buying even the idea of continued recovery. But with foreward P/E ratios and Treasury interest rates both at extraordinarily low levels, the odds still favor better returns to stocks than bonds in the years ahead.
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Tuesday, July 20th
Housing Starts Forecast Last
Starts, mils, ann rate 0.537 0.593
Permits, mils, ann rate 0.578 0.574
Thursday, July 22nd
Jobless Claims Forecast Last
Initial Claims, 000's 440 429
Continued Claims, 000's 4,525 4,681
Leading Economic Indicators Forecast Last
Index, %ch - 0.2% 0.4%
Existing Home Sales Forecast Last
Sales, mils, ann rate 4.570 5.660
