The data dependent Federal Reserve sees green-shoots in the U.S. economy. As they should after trillions of dollars of monetary and fiscal stimulus since the financial crisis. Employment data is nearing their targets for a ZIRP exit despite inflation lagging its targets. Whether it is a direct result or not of lower unemployment, the housing market has shown improvement as have auto-sales, regularly registering new monthly records for the better part of this year, despite the backdrop of overall weak retail sales.
As always, there are disconnects between the economic data, and the stock market, and importantly how consumers choose to spend their dough. In 2015 it appears that consumers have chosen to put off small purchases in the form of apparel in place of large purchases like cars, and the re-emergence of the first time home-buyer. But this is where this all gets a bit confusing when trying extrapolate to the stock market. The year to date weakness in the Transports (IYT) and Industrial (XLI) stocks paint a slightly different story to that of the improvement in housing, with the IYT down 8.5% (its largest component, FDX, just moved into the red for the year):
And the XLI is churning just above the lows for the quarter, down 1% on the year. Neither the XLI nor the IYT has confirmed the new highs at any point in the S&P in Q2:
You can look at the recent breakout in the Homebuilder etf (XHB) and try to extrapolate, but I assure you that the weight of Transports and Industrial stocks is far greater in the S&P than that of the XHB:
I guess the question to ask is whether the recent flurry in home-sales is a last ditch effort for buyers to lock in rates before they go higher? Just as banks have come to the conclusion it is a good time to extend credit as rates start rising? But wouldn’t it make sense to see strength in truckers, rails and airfreight, or machinery stocks at the same time??
With the S&P less than a 1% from its all time highs, the Fed could actually be doing damage to investor psychology with their reluctance to raise rates. They’re failing to bless the economy with a stamp of approval after most of their stated targets have been reached. If investors dislike anything, it’s uncertainty. It’s hard to get a read on just what is going on in the economy right now as we see so much divergent data. But taken as a whole it looks decent. But the Fed’s hesitance right now has an actual effect on the real economy and implies we’re on shakier ground than we probably are.