Economic Bright Spots

New Home Sales

The economy is slowing reopening fueling investors continued optimism that the economic carnage inflicted by the pandemic will be quickly heeled. There are several signs that some sectors may recover quickly due to pent up demand including the housing sector. This week new home sales were reported for the month of April coming in at an annualized rate of 623,000 homes. This was far better than economists had expected and down only -6.2% from the same month a year-ago.

Source:U.S. Census Bureau: https://www.census.gov/construction/nrs/historical_data/index.html

As the above graph shows new home sales had been surging higher but a decline such as we saw in the most recent month is really not out of the ordinary. Two factors likely contributing to this strength are record low interest rates making housing more affordable as well a very low inventory of existing homes for sale.

Although new home sales are performing relatively well nationwide the difference by region is dramatic. In the Northeast and West sales are down -26% and -34% respectively while in the Mid-west and South numbers are up +26% and +5%.

Corporate Bond Yields

Investors’ confidence in businesses is not only being reflected in the stock market the past two months but also in the bond markets. Corporate bond yields, the price companies pay to borrow money, are back near multi-year lows as illustrated in the below graph. There was a massive spike in yields when the pandemic first broke and concerns mounted about the possibility of wide-spread bankruptcies. Those fears though quickly subsided helped by an unprecedented move by the Federal Reserve to support these bonds.

Source:www.YCharts.com Moody's Seasoned Aaa Corporte Bond Yield

In addition to new home sales and low corporate bond yields, additional economic bright spots are discussed below.

This Week’s Performance Highlights

Source: www.YCharts.com

After a hair-raising February and March, the markets have now put together two back-to-back monthly gains with the S&P 500 up +36.1% from their late-March lows. The “Risk On” investor behavior from the prior week continued throughout most of this week’s shortened holiday week with generally the year’s worst performing and riskier investments outperforming less risky.

Economic Indicators

Initial jobless claims decreased from the prior week, coming in at 2.1 million, but remain nearly 10 times pre-pandemic levels. The great news though is the continuing claims, or the total number of people receiving benefits, fell to 21.05 million from 24.9 million the week before suggesting many people are returning to or finding new work. The question remains as to how many of the massive number of layoffs are temporary or permanent.

Consumer Confidence stabilized in May coming in at a reading of 86.6 after falling sharply the month before. This is further good news for the economy as consumer spending drives about two-thirds of the economy and more confident consumers tend to spend more money. When drilling down into the details of the report, consumers were slightly less confident about the current economic conditions but more optimistic about the outlook in six months as many expect the impact of COVID-19 to pass rather quickly. In a separate report from the University of Michigan, their Consumer Sentiment reading also inched higher in May.

During the month of April, expected to be the low point during the Pandemic, consumer spending fell -13.6% following the -6.9% decline in March. All of this was generally expected given other previously reported economic data. A bit of a surprise though was the +10.5% jump in personal income entirely driven by government payments to consumers as discussed above.

Orders for durable goods plunged for a second month falling -17.2% in April. Transportation, such as orders for airplanes, was the hardest hit down -47.3%. On the bright side, economists has expected business investment, a key measure for the economy, to fall by -15.4% but it was only down -5.8%. Hopes are that numbers will start improving with the reopening of the economy.

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