Dollars and Sense: Grasping at optimism and fireworks ahead

Still wagging the dog. After last week’s big drops, the stock markets made something of a recovery this week. The announcement by Ben Bernanke on June 19 that the Federal Reserve would start tapering its bond-buying program sent the markets down sharply last week, and on Monday that decline continued. But then the markets started climbing back. However, if you went looking for good news to explain the rise, you’d have to look hard. The markets were going up, but the economic news this week was mixed, at best. Gross domestic product expanded at a measly 1.8 percent annual rate in the first quarter, the Commerce Department said in its final estimate on Wednesday. Economists polled by Reuters had expected first-quarter GDP growth would be left unrevised at 2.4 percent. So why were the markets up on such bad news? Because it was so bad that traders are now guessing the Fed will delay the end of the bond-buying program that has fueled market gains for the past couple of years. Once again, it’s Fed policy and not the underlying fundamentals of the economy that seem to be driving the stock markets.

Housing, too. And it looks like it might be driving the housing market too. Interest rates are so low that housing prices and sales are rebounding very quickly. But Robert Shiller, who helped create the influential Case/Shiller index of housing prices, said big price gains in Las Vegas, Los Angeles, San Francisco, Miami and Phoenix, fueled by a large influx of outside investor money, are a possible sign of trouble ahead.

Retailers upbeat. I was at the International Christian Retail Show in St. Louis this week. Retail is one of the largest segments of the economy, and the mood at this show was mostly upbeat. Close to 2,000 retail professionals came this year. That’s down from the heyday of the Christian bookstore industry a decade or more ago, before big-box retailers and the Internet started cutting into their business. But the show has seen a slow rebound in the past few years. And most of the folks I talked with said they were hoping for a good year ahead. Their hopes got a boost this week in the form of a report from the Commerce Department that said consumer spending for May was up 0.3 percent. So all in all, retailers, including these Christian retailers, are cautiously optimistic about their prospects for the year ahead.

The week ahead. Here in the U.S. we’ll see the Fourth of July holiday, so it would be a good guess that we won’t get much new economic data. In fact we have a fairly robust reporting week coming up, in part because it’s the first of the month. We’ll see a report on construction spending from the Commerce Department. This report is pretty volatile and it’s a report from May, which is now receding in the rear view mirror, so it’s hard to read much in a single month’s number. This one typically doesn’t move the markets. But we’ll also get auto and truck sales numbers for June on Tuesday, and the number that everyone focuses on is the monthly unemployment number, due out on Friday from the Labor Department. So, yes, it’s likely to be a pretty quiet week in the markets, but keep in mind that Independence Day is an American holiday, and the rest of the world will be open for business as usual. It’s not completely out of the question that we could get a bit of Fourth of July fireworks from the markets this week.