Market Perspective for May 27, 2016

The markets rallied more than 2 percent heading into the long Memorial Day weekend. U.S. Federal Reserve Chair Janet Yellen continued laying the groundwork for a summer rate hike in a statement on Friday which highlighted improving economic data; markets have priced in the odds of a June increase at over 30 percent and 58 percent for July. Financials, health care and technology all posted gains as possible rate hike expectations stabilized. Gold was down on the week, but the price of West Texas Intermediate Crude reached an intraday high above $50 per barrel on Thursday before retreating back into the $49 to $49.50 range.

Overseas, the Japanese yen held steady on signs of weak growth and a decline in the CPI, both of which spurred Japanese stock sales in anticipation of more central bank asset purchases. European manufacturing, services and composite PMI data released Monday showed weaker than expected growth. Tapping a 16-month low, the 52.9 reading was lower than the 53.2 consensus estimate and also supports central bank intervention.

U.S. economic reports were much stronger. On Monday, new homes sales smashed expectations by nearly 17 percent as Americans bought homes at the highest rate since January 2008. Buyers were encouraged by a steady job market and low mortgage rates. Home purchases fueled the 2.1 percent increase in the weekly mortgage application index. Pending home sales in April also rose to their highest level in almost a decade.

On Thursday, better-than-expected weekly unemployment claims were reported and orders for durable goods rose 3.4 percent. Economists were looking for an increase of only 0.7 percent. The number of Americans filing for unemployment fell to 268,000, below estimates.

On Friday, the Bureau of Economic Analysis released the second estimate of Q1 GDP growth, raising it from 0.5 percent to 0.8 percent. All of the positive reports in the past week lifted the Atlanta Federal Reserve’s real-time Q2 GDP growth forecast to 2.9 percent.

In earnings news, Hewlett Packard (HPQ) beat consensus earnings estimates. Shares rose on the company’s decision to merge Hewlett Packard Enterprise’s (HPE) business IT Services unit with Computer Sciences (CSC). The merger is considered beneficial to both companies in terms of cost savings and economies of scale. In retail earnings, Costco (COST) easily beat consensus earnings and revenue estimates. The warehouse giant’s sales growth continues to surpass those of its rivals Wal-Mart and Sam’s Club. Ongoing weakness in the retail apparel sector was reflected by the drop in shares of Abercrombie & Fitch (ANF), which fell when the company missed expectations. Deep-discount chain Dollar General (DG) bucked the trend and posted strong results that readily beat expectations with same store sales up 2.3 percent. Sears (SHLD) sales, revenues and earnings were disappointing, but the company’s shares rose on news that the organization was exploring partnership arrangements for some of its popular brand names like Craftsman tools and Kenmore appliances to regain profitability.

Consumer discretionary, financial and healthcare sector funds rallied more than 2 percent on the week. The technology sector enjoyed the strongest performance climbing more than 3 percent as tech giants such as Apple (AAPL) share prices recovered. The Nasdaq won the week as it rallied more than 3 percent. The Russell 2000 Index beat large-cap competition, but both the S&P 500 and Dow Jones Industrial Average gained more than 2 percent on the week.

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