Corporate Earnings and Stimulus Hopes Outweigh Disappointing U.S. Economic Data

On Thursday the S&P climbed to a 2 month high following a wave of positive corporate earnings reports and renewed hopes that the Federal Reserve will undertake further stimulus measures to assist the slow recovering U.S. economy. 

The latest economic data released on Thursday shows that the U.S. economic recovery is still not operating at full speed.

New housing data released from the National Association of Realtors for existing home sales in June shows that home sales declined 5.4% in June to a seasonally adjusted 4.37 million, an 8 month low. The briefing forecast was for 4.65 million.

The number of first time home buyers fell in June, making up 32% of sales in June compared to 34% in May.

Despite the weaker than expected June housing data, national sales of existing homes have increased 4.5% year over year.

Interest rates continue to move lower for qualified homeowners. Interest rates on a 30 year mortgage have reached lows not seen in over 60 years. A 30 year mortgage interest rate dropped to 3.53%.

 Weaker Manufacturing and Jobless Claims Data

Latest Philadelphia manufacturing data released today was disappointing and shows a 3 month manufacturing contraction.

Meanwhile, jobless claims released today revealed an unexpected increase.

Initial jobless claims were 386k versus the Briefing forecast of 360k. The previous initial jobless claim was 352k.

The national unemployment rate was unchanged in June, remaining at 8.2 percent, according to figures released the Bureau of Labor Statistics.

The U.S. economy added 80,000 jobs in June, barely an improvement from the 77,000 jobs added in May.

Food Prices

Due to serious drought conditions in the Midwest that has not been witnessed in a half century, food prices are expected to climb during the second half of the year.

Despite the bad economic news, the U.S. stock market remained positive for the day, shrugging off the stagnating economic data, focusing on positive corporate results, and anticipating that the Federal Reserve will expand their balance sheet to engage in further quantitative measures (QE3) to assist the U.S. economy if economic data worsens.

Additional easing measures will likely weaken the U.S. dollar, boost commodities, and assist equity markets.

However,  there are some market investors who believe that further quantitative easing may not prove to be as effective compared to previous easing measures already untaken by the Fed through QE1, QE2, and Operation Twist.

Jason Trennert, Chief Investment Strategist at Strategas Research Partners, spoke today on Yahoo Finance Breakout about the Law of Diminishing Returns which he applied to the Fed’s past easing policies.

Strategas’ research indicates that S&P 500 gains have declined over time with the progression of each quantitative easing program.

The S&P gains grew from 80% during QE1 to 33% in QE2 and to 26% from Operation Twist.

 

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