Market Perspective for May 15, 2015

The S&P 500 Index closed at a new all-time high on Thursday and the Dow Jones Industrial Average, which has been a laggard, may join it on Friday. The Dow is still trailing this year, but the recent increase in financials, thanks to higher interest rates, has pushed the sector up to its highs for 2015. While the Nasdaq and Russell 2000 performed well this week and still lead the Dow for the year, but they have a way to go to before reaching new records.

Interest rates were the big story of the week. The 10-year treasury yield came close to hitting 2.35 percent before it settled down to about 2.15 percent in Friday trading. Although the spike is impressive, it has only taken yields back to November levels. At this point, rates have not broken the downtrend begun in 2014, let alone the larger downtrend in place since 2007. In contrast, the 2-year treasury yield continues to climb because investors expect the Federal Reserve will increase rates later this year.

One factor keeping interest rates from moving higher is the slow economic pick-up so far this year. The Atlanta Federal Reserve’s GDP Now model projects growth of 0.7 percent this quarter, down 0.1 percent following a disappointing retail sales number from April. This follows a slower than expected first quarter GDP growth rate.

The weather has been blamed for slower growth at the start of the year in 2014 and 2015, but the underlying data doesn’t support the argument, with regions and industries unaffected by bad weather exhibiting similar trends. The data does pick up substantially as the year goes on though, which makes it appear like a weather related phenomena on the surface. Barclays analysts dug into the numbers and in a report out this week, they’ve found that seasonal adjustments by the government may be the culprit, with first quarter GDP actually 1.8 percent instead of the reported 0.2 percent once seasonal adjustments were removed. Overall, the government has been reporting the correct annual numbers, but due to their adjustment of the data, it is distorting the path of growth, making it seem as though growth is slow early in the year and faster later in the year.

This matters for the market right now because investors are trying to guess when the Fed will hike interest rates and there’s even some recession talk due to the weak start in the second quarter. Investors are pushing back their rate hike expectations based on this data. Bearish sentiment in the market is also high; the American Association of Individual Investors survey has fallen to one of its lowest points since 2013 at 26.7 percent bullish. Yet with stock indexes near or at their all-time highs, the market has more room to move higher. If economic data ticks up again, which seems likely given the raw data looks better than the government’s adjusted numbers, another leg up in the bull market could be close at hand.

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