We had a number of noteworthy data points hit last week, but despite the signs of a weaker-than-expected -- if not cooler -- economy, the stock market keeps on trucking, as evidenced by the S&P 500's new 52-week high, set earlier this week.
While we remain focused on earnings growth, valuation and other fundamentals, we chalk it up to the simple fact the market is standing on the pin that is the Fed rather than fundamentals as it waits for a definitive timetable for any interest rate hike. The more missed data relative to expectations we get (and we've gotten plenty in recent weeks) and signs there is little to no inflation -- check Friday's April CPI report -- any rate hike increasingly looks like a late 2015 event at the soonest.
To Mr. Market, that means let the good times roll ... at least until bubble concerns start to, um, bubble up. For us, it means being even more selective as we identify companies primed to profit from demonstrative tailwinds and pain points.
May ISM Flash PMI data released midweek certainly didn't help, painting a picture of slower global growth. Even though housing starts rebounded as expected in April, more due to multifamily starts than single-family, April existing home sales disappointed and builder sentiment softened in May. Supply remains an issue, with just 4.5 months supply for existing single-family homes in March. While the logical thought is that would spur construction activity, based on disposable-income levels, the lack of quality job creation and Gallup's findings that people are spending more on things they need than what they want doesn't put the housing market in an "if you build it, they will come," Field of Dreams situation.
Per Gallup, over the past nine months, there has been a general but modest decline across almost all spending categories, driven by a decreasing number of Americans saying they are spending more on each category. The mixed bag of retail earnings -- or more correctly, retail revenues -- reported by Macy's (M), Best Buy (BBY), Kohl's (KSS), Gap (GPS) and others confirms this as well as reflects personal income and spending data over the past several months. For now, our call is to remain on the housing and retail sidelines.
Turning to the week ahead, we have a shortened trading week given the Memorial Day holiday in the U.S. as well as a bank holiday in the UK, both of which should make for a busier week for those of us not on vacation. That's right, this weekend marks the unofficial start of summer, which historically has been a slower time in the market, hence "sell in May and go away" or "tech wreck summer."
For those of us manning the desks, trading stations and conference rooms, helping shed more light on the recent downbeat U.S. May Flash Manufacturing PMI data, the coming week sees not only April durable orders, but also several regional Fed manufacturing surveys (Richmond, Dallas, Chicago). When diving into durable orders, remember to focus on the core capital goods line, which has been flat to down over the last five months and is not impacted by the swings in the transportation or defense sectors. Because the durable-orders report tends to take its cue from orders and other patterns in the regional Fed surveys, we'd recommend paying attention to those this week. Thus far the May Empire Manufacturing Index missed expectations and the Philly Fed Index fell month over month. Not a good start to May manufacturing data, in our view.
Also in the week ahead, we'll get more housing data in the form of April new and pending home sales as well as quarterly results from homebuilder Toll Brothers (TOL). Given the mixed housing data, we'll be keying in on Toll's order and pricing results as well as its use of incentives and other potential margin detractors.
Just because it's a short week and we're moving into the "summer" mentality doesn't mean there is a lack of earnings to watch in the week ahead. Far from it. We'll continue to hear from retailers -- Brown Shoe (BWS), DSW (DSW), Michael Kors (KORS), Tiffany (TIF) and others -- as well as some technology and cybersecurity companies -- Avago (AVGO), OmniVision (OVTI), Palo Alto Networks (PANW) and Splunk (SPLK).
Given the growing attention being paid to the spreading avian bird flu that is hitting the Midwest hard, we'd recommend paying attention to Sanderson Farms' (SAFM) earnings call, as the topic is sure to be a hotbed of conversation. Donning our food-chain perspective, we've noticed in the past month that the wholesale price of "breaker" eggs has nearly tripled, while prices for wholesale large-shell eggs, like the ones you tend to buy at your grocery store, have jumped about 85% to $2.20 a dozen in the Midwest.
Those moves led Post Holdings (POST) to warn that about 25% of its egg supplies have been affected, forcing it to discontinue some product lines under its Michael Foods business. Nestlé SA -- which uses eggs for some of its Dreyer's, Edy's and Häagen-Dazs ice cream products -- said it is braced for shortages and working with suppliers to help protect hens. This has us wondering if eggs will be the new winter weather or Pacific port closure that will hit food and restaurant companies in the June and September quarters. We may be moving more into a digital society, but old-school supply-and-demand still works.
Rising water, egg, chicken and other prices will nip at consumer dollars. Imagine, however, the hit to disposable income should major insurers proposing hefty rate boosts for plans sold under the federal health law succeed. Something to keep our eyes and ears on as we move past the holiday weekend.
Below is a more detailed look at the economic data in the week ahead. For a fuller list of corporate earnings to be had over the next five days, click here to view The Street's weekly earnings calendar. Enjoy the long weekend and be sure to check back for our midweek column, in which we will dish on the first half of the trading week and other key matters and thoughts, as well as how to play it all.
Economic Calendar for May 25-29
25-May US Stock Market Closed
26-May Durable Orders
26-May Durable Goods ¿ex transportation
26-May Case-Shiller 20-city Index
26-May FHFA Housing Price Index
26-May New Home Sales
26-May Consumer Confidence
26-May Richmond Fed Manufacturing Index
26-May State Street Investor Confidence Index
26-May Dallas Fed Manufacturing Survey
27-May MBA Mortgage Index
28-May Initial Claims
28-May Continuing Claims
28-May Pending Home Sales
28-May Natural Gas Inventories
28-May Crude Inventories
29-May GDP - Second Estimate
29-May GDP Deflator - Second Estimate
29-May Chicago PMI
29-May Michigan Sentiment - Final