Market Perspective for May 27, 2014

While this will be a light week for economic reports, the second estimate of GDP growth will be released on Thursday. Analysts have lowered their estimates to around negative 0.5 to 0.6 percent based on Q1 economic data. The first estimate indicated 0.1 percent growth at the end of April. A lower figure certainly isn’t good new, but stocks have already priced in the lower GDP figure. At this point, investors are focused on the current quarter and second half growth rates. If data continues to show improvement, it will be very good news for the market.

We saw some of that more timely data last week as the Markit flash PMI showed an increased rate of expansion in the U.S. manufacturing sector. The reading jumped to 56.2 in May from 55.4 the previous month. Any reading above 50 indicates growth. Additionally, Markit’s Economic Output index improved from 58.2 in April to 59.6 this month. This is the biggest increase in over 3 years. The Chicago PMI will be released this Friday and is also expected to increase in May, a sign that the economy is picking up.

The major indexes could use a boost from positive economic data. The S&P 500 Index and Dow Jones Industrial Average come into the week at or on the cusp of new highs. The Russell 2000 Index and the Nasdaq both bounced last week, but could stand to put more distance between themselves and their lows. Adding to the bright outlook coming into the week is the Dow Jones Transportation Index, which closed at a new high on Friday.

Oil prices have also broken out to the upside, though a further climb is necessary to hit a new high for the year. West Texas Intermediate Crude climbed above $104 a barrel on Friday with the closing high for the year just below $105. Energy shares had been strong until mid-April, at which point they started moving sideways in a very narrow the trading range. If the bulls take control of the market this week, look for energy to do well and set new highs.

Finally, the best returns from a rally over the next few weeks may come from small caps, which have struggled this year. Keep a close eye on these stocks as investors looking for value may bid up these oversold shares.

Economic Reports: The U.S. GDP report is the data highlight for the week. On Friday, Canada, India and Brazil all report GDP as well. Trade balance figures will come out over the weekend, with Korea scheduled to report on Saturday. Also on Saturday, the Chinese manufacturing PMI is due.

Earnings: Another week of retail dominated earnings. Abercrombie & Fitch (ANF), Costco (COST) and Dollar General (DG) are among the retailers reporting. Toll Brothers (TOL) will impact the home builder sector when it reports.

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