Friday, May 30, 2014

Lost Momentum

The U.S. Government recently released results of economic growth for the first quarter. The report indicated that the economy shrank by 1%. While the expectation had been for slow growth, this significant negative reversal signaled a loss of momentum from the fourth quarter of 2013. The impact is visible in the housing industry, where both existing home and new home sales slowed. One would think that this information would result in a negative stock market reaction, but the S&P 500 soared to a new high. At the same time, the slowing economy has resulted in the 10-year Treasury Bond dropping in yield, from about 3% to 2.44%, with an increase in the value of underlying bonds. This change in the Treasury values has also impacted high quality bonds, with yields decreasing and values rising. Taken to another level, this lowering of interest rates has pushed the mortgage interest rates back down, making it less expensive to buy a home. The slowing momentum of the first quarter would appear to have a very positive impact on the second quarter. We are beginning to see home sales, consumer spending and manufacturing increase. For these reasons, stocks have climbed. Clearly, the loss of momentum from the first quarter, due primarily to bad weather, has turned around. We will now have to wait and see if momentum can be regained.
Ed Mallon