Consumers to the Rescue: Upbeat Data Drive Stocks Higher

Consumers played the role of cavalry today. Stocks started the day sharply higher, but coughed up gains in the late afternoon, as news broke of Special Counsel Robert Mueller’s latest indictments.

Mueller announced today that he had charged 13 Russians and at least three Russian groups for meddling in the 2016 U.S. election.

After news of the indictments hit, stocks wobbled and struggled to stay in positive territory. Optimism over consumer sentiment and housing starts played tug-of-war with anxieties over the Russia probe.

Gains appeared imperiled in the last hour of trading. But in the final reel, consumers rode to the rescue.

The Dow Jones Industrial Average and S&P 500 closed higher. The Nasdaq closed in the red. Overall, it was the best week for stocks in six years.

The national pastime…

Snap quiz: What’s the national pastime of America? If you answered baseball or football, you’re wrong. It’s shopping.

Consumer spending accounts for nearly three-fourths of U.S. gross domestic product. Despite fears of inflation, federal budget deficits and rising bond yields, upbeat consumer sentiment propelled stocks mostly higher on Friday (albeit modestly).

Gains were sharper in the morning, until Mueller showed his hand. Deputy Attorney General Rod Rosenstein also said today that the Russians paid Americans to set up hundreds of fake social media accounts to influence the election.

Political risk has returned. More indictments are likely to come. Wall Street hates uncertainty.

The political-driven volatility today occurred amid a backdrop of positive economic data. The data won the day.

Shoppers are feeling wealthier as the bull market fuels their 401(k) plans and Individual Retirement Accounts. Add wage growth, low unemployment and rising home prices to the mix, and consumers are increasingly keen to open their wallets.

The University of Michigan reported on Friday that its consumer-sentiment index rose to a reading of 99.9 in February, up from 95.7 in January. The reading for February is the second-highest level in 14 years and exceeds consensus expectations of 95.3 (see chart).

The biggest asset for most Americans is their home. The government reported positive news on that front, too.

The U.S. Commerce Department said Friday that housing starts jumped 9.7% to a seasonally adjusted annual rate of 1.33 million units, up from 1.21 million in December and 1.24 million in January 2017.

That was the highest level since October 2016. Construction has hit levels last seen since before the Great Recession.

Building soared in the North, South and West. Two-thirds of the new housing units were single-family homes, the staples of the housing sector.

Fears of inflation, volatility and political dysfunction are being outweighed by a growing sense of income and job security.

Wage growth is starting to benefit blue-collar workers, a trend that’s enhancing the so-called wealth effect. Wal-Mart (NYSE: WMT) recently announced a hike in its minimum wage for employees. Target (NYSE: TGT) has done the same. It’s not just Big Box retail chains. Pay is rising for workers in a wide variety of industries.

Wages are on a tear for skilled workers, too. Construction workers are in big demand. To get them, construction firms need to pay more. These higher wages trickle down into greater expenditures for homes, trucks, consumer gadgets… you name it.

“Machine trading” only goes so far to explain the return of volatility. The nerve-wracking month of February should remind you that the stock market is still driven by the same emotional forces as it was decades past, when individuals dominated trading. Indeed, today’s market is more susceptible than ever to the ebb and flow of passions, thanks to the ability to move trillions of dollars at the click of a computer mouse.

Over the near term, stock prices tend to reflect popularity, perception and other ephemera. The proven way to make money over the long haul is to follow the value criteria of super-investor Warren Buffett: pinpoint stocks that possess solid long-term prospects for capital appreciation, but trade at prices beaten down by irrational investor fears. Retail stocks look particularly promising right now.

Wage growth probably will fuel inflation. Rising interest rates will make mortgages more expensive, which could in turn choke off the housing boom. Tax overhaul’s curtailment of the mortgage interest deduction could also dampen the housing sector.

But the answers to these unknowns lie in the future. Today, consumers rode to the rescue and saved the market from a down day.

Friday Market Wrap

  • DJIA: +0.08% or +19.01 points to close at 25,219.38
  • S&P 500: +0.04% or +1.02 points to close at 2,732.22
  • Nasdaq: -0.23% or -16.96 points to close at 7,239.47

Friday’s Big Gainers

  • MuleSoft (NYSE: MULE) +17.91%

Software provider issues strong earnings.

  • Globant (NYSE: GLOB) +9.04%

Software firm’s operating results impress.

  • Intelsat (NYSE: I) +9.03%

Partnership with peer looks promising.

Friday’s Big Decliners

  • Cloud Peak Energy (NYSE: CLD) -21.61%

Coal producer issues weak earnings.

  • Arista Networks (NYSE: ANET) -19.03%

Cloud provider’s earnings disappoint.

  • Ryder System (NYSE: R) -9.21%

Analysts disappointed by truck lessor’s earnings.

Letters to the Editor

“How should I trade in the wake of the huge stock market declines of February 2 and February 5?” — Deb H.

Reduce your exposure to growth stocks; pocket some profits from your winners that are now overvalued; increase your allocations in cash and inflation hedges; and make sure your portfolio contains at least 5%-10% in precious metals.

Whatever you do, ignore political optics like press conferences and big speeches. For example: events such as “infrastructure week” are, quite frankly, empty theatrics.

As the humorist Will Rogers once said: Things in our country run in spite of government, not by aid of it.”

Questions about today’s market risks? I’m here to help:

John Persinos is managing editor of Personal Finance and chief investment strategist of Breakthrough Tech Profits.




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