Tuesday, May 27, 2014
Stocks made strong gains last week, with the S&P 500 making
a new all-time high and closing above the 1900 level for the first
time, with even the small-caps participating in the gains. The
positive trend will likely continue today as well, despite the
mixed Durable Goods report this morning. The Case-Shiller home
price index and the Conference Board's consumer confidence report
The April Durable Goods reading came in better than expected on
the 'headline,' weak at the 'core' level, but with positive
revisions for the prior-months level. 'Core' Durable Goods,
officially called non-defense capital goods excluding aircraft, is
generally considered a proxy for business capital spending. The
overall hope in the market is that businesses will start ramping up
their outlays this year on equipment, software and structures,
which has been a missing pieced in this recovery thus far.
With record cash on their balance sheets, companies certainly
have the wherewithal to spend more. But they have been hesitant to
do that, citing weak demand in the market. They have instead been
returning cash to shareholders instead through dividends and share
buybacks. The trend has lately shifted to outright acquisitions,
with companies more appearing to be more willing to buy their
rivals than invest in organic growth.
This morning's announcement of
) for roughly $5.5 billion follows the latter's plans to buy out
) for $4.3 billion. We have seen plenty of similar deals in the
food, pharmaceutical and technology sectors. The surge in M&A
announcements is certainly a sign of greater confidence in the
business and economic outlook and could be a precursor to increased
capital spending in the days to come.
Recent economic data has been showing a rebound in growth in the
current period after the first quarter's flat finish. But the
rebound in activity levels has not been all around, with growth in
retail sales, industrial production and housing not as robust as
many had been hoping for. This likely indicates that some of the
more optimistic GDP growth estimates for the current period may
need to come down.
Director of Research
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