If you’re an equity investor, you can’t complain about stock performance in January. Most major international markets rallied and posted very impressive returns. The Dow broke through 14,000 and the S&P 500 broke through 1500 for the first time since 2007.
While TSX returns were also positive, Canadian equities did not participate in the rally to the same extent as their international peers. The S&P/TSX Index hasn’t been able to break through the 13,000 level since 2011, but perhaps some positive earnings reports in February might help it get there.
A number of economic statistics suggest the U.S. economy continues to expand. The S&P Case-Shiller index indicated that U.S. home prices continue to climb year-over-year, the ISM Manufacturing index climbed from 50.7 to 53.1 in January, and the U.S. employment report indicated that the U.S. economy created 157,000 jobs while economists were forecasting 165,000.
Although this last statistic was technically a miss, investors were more pleased that last month’s print was revised up from 155,000 to 196,000 and November’s report was revised up from 161,000 to 247,000. Economists were surprised last Wednesday, though, as the Q4 GDP report showed the U.S. economy contracted by 0.1% last quarter. But we’ll come back to this in our question of the week.
Research in Motion, or Blackberry, as the company is now called, finally unveiled the Blackberry10 device. Much of the enthusiasm built into the stock prior to the launch faded after it was revealed that U.S. carriers likely wouldn’t start selling the device until March and investors questioned the company’s ability to maintain profit margins once the new device hits the market.
QUESTION OF THE WEEK
I heard the U.S. economy contracted in the fourth quarter, but I also heard jobs were created and manufacturing seems to be stable. I’m confused: how can some data points be positive while GDP growth contracted?
This is a very good question, and one that likely stumped economists initially, as the 0.1% decline in U.S. GDP in the fourth quarter was not even close to the 1.1% growth rate that was expected.
After pouring over the data most economists came to the conclusion that the difference between the actual and forecasted rates was likely a big reduction in defence spending. Conspiracy theorists will conclude that the U.S. government kept spending on defence right up until the election, but once the election was over the spending dried up.
Furthermore, our colleagues at Credit Suisse note that most of the jobs created in January came from the retail, health/education, leisure/hospitality, and construction industries. So it was possible to see jobs created and the ISM Manufacturing index increase last month even though overall growth actually contracted in the fourth quarter.
Admittedly, we could see some of these numbers revised in the future, but positive stock market returns indicate the market is more focused on jobs, and investors seem content for the time being. It is also fair to note that the jobs and manufacturing data reported were for the month of January while the GDP data reflected the final quarter of last year.
With employment and housing indicators moving in the right direction, the U.S. economy is establishing a stable level of growth it can build upon as we progress through 2013.