Daily Gains Letter

More Economic Indicators Show Next to Nothing Has Changed for U.S. Investors

By for Daily Gains Letter |

More Economic Indicators Show Next to Nothing Has ChangedTwo things have been consistent this winter: bad weather and bad economic news. And both just keep on rolling. With spring just around the corner, the weather will clear up; the U.S. economic news, on the other hand, might not be so lucky.

Over the course of the last week or so, a raft of weak economic news and earnings has welcomed the markets.

For starters, a higher number of Americans filed applications for unemployment benefits for the week ended February 8. Jobless claims climbed by 8,000 to 339,000; the four-week moving average for new claims increased to 336,750 from 333,250.

For the week ended February 15, applications improved—though barely—by 3,000 to 336,000, which was less than what was forecast. The four-week moving average (which is considered a less volatile figure), increased by 1,750 to 338,500.

And then there’s more bad economic news on the home front. Last week, the National Association of Home Builders (NAHB) said that its monthly housing sentiment index tanked from 56 in January to 46 in February, the largest monthly drop in history. The negative sentiment goes hand in hand with the two-percent drop in applications for U.S. home mortgages for the first week of February. Mortgage application activity continued its nascent drop in the second week of February, falling 4.1% to 380.9.

Further weakness is being felt in U.S. manufacturing. Economic news from both the New York and Philadelphia indices disappointed. The New York manufacturing gauge slowed in February after hitting a 20-month high in January. Manufacturing conditions slipped to 4.48 in February from 12.51 a month before. Analysts had forecast a much more generous reading of 9.0.

The Philadelphia manufacturing index cratered in February from a positive reading of 9.4 in January to a reading of negative 6.3, significantly below analysts’ forecasts of positive 7.3. The Philadelphia manufacturing index had been in positive territory for eight months.

The manufacturing indices are an important indicator of the health of factory conditions in two of the nation’s biggest industrial regions.

Keep in mind that these numbers come as an increasingly larger number of companies revise their earnings guidance lower. During the fourth quarter of 2013, a record 88% of S&P 500 companies that provided preannouncements issued negative earnings guidance. For the first quarter of 2014, 80% of the S&P 500 companies that have issued guidance revised their earnings lower; this compares to 78% of S&P 500 brands that did so in the first quarter of 2013.

So why some analysts have been caught off-guard by the bad economic news is beyond me.

The weak economic news and economic signals make it difficult for investors to know which companies to add to their retirement portfolio. Investors looking to fortify their retirement portfolio with stocks might want to forgo riskier equities that are more readily impacted by bad economic news in favor of larger profitable stocks with ongoing momentum that pay dividends and can more easily weather negative economic news.

You won’t find any under-the-radar steals in this arena, but you will be looking at strong companies reporting consistent earnings with great momentum, which is a nice change from what most companies are doing.

Three well-known companies that fit under this umbrella include: Northrop Grumman Corporation (NYSE/NOC), Raytheon Company (NYSE/RTN), and Legg Mason, Inc. (NYSE/LM).

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