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
