For those following business news recently, it can certainly be confusing at times whether the economy is still improving. The most recent employment report is a good example, as the figures showed a decline in the unemployment rate, but the number of new jobs created was below expectations. I will try to examine what the recent data has been indicating, and the conclusions that can be drawn from the various reports.
Auto sales are one area where the results have been quite positive in recent months. While a good portion of the sales reflects replacement demand, the average selling price is at a record level, which implies consumers are willing to pay for more than basic transportation. Housing is even starting to look a little brighter. The rental market is quite strong, as vacancies are declining and monthly rents are increasing. While prices of existing homes are still relatively weak, homebuilders have been one of the best performing groups in the market this year implying better future housing data.
Other areas of the economy also look reasonably solid. Surveys of purchasing managers in both services and manufacturing indicate an economy that is still expanding. Oil prices have recently declined, in part because of a somewhat stronger U.S. dollar. This should lead to lower gasoline prices and a possible pick-up in consumer confidence. First quarter corporate profits have been good, and are now at record levels.
The labor market is the one area of the economy that has not shown the normal improvement that would be seen with an economic recovery. While the unemployment rate has declined in recent months, it has largely been due to a lower participation rate. In fact the number of people of working age participating in the labor market is at its lowest level in 30 years.
The other area of concern for investors is the international environment, as growth in most areas of the world appears to be slowing. China, India, and Brazil while still expanding, have seen their growth rates slow recently. The situation in Europe remains troublesome, and a new president in France adds to uncertainty, especially with regards to their cooperation with Germany.
For an investor the key factors to look at are the future direction of corporate profits and interest rates. International developments are important because many companies derive 50% or greater of their earnings overseas. With the U.S. appearing reasonably stable, and the rest of the world slowing, I would expect the pace of corporate profits to soften, but still expand. In addition interest rates remain extremely low, which is a positive for the stock market. Because the stock market is relatively inexpensive given its current level of earnings, as long as corporate earnings continue to expand the stock market should do reasonably well.
Over the next several months I would expect economic data in the U.S. to be similar to what we have seen recently. What will cause markets to move will most likely be Europe. For now, I would not expect the problems in Europe to cause U.S. profits to turn negative. I think currently, the best course of action, is to have positions in stocks be close to your long term target.