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Is Bad Economic Data Good for Stocks?

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Thursday, May 16, 2013

The stock market has plenty to chew on in today’s trading session and most of the data this morning in on the negative side. Jobless Claims jumped in the wrong direction, while Housing Starts came in weaker than expected and the CPI numbers seem be in the benign territory. The housing data is not all bad, as housing permits came in much better than expected.

Housing Starts for April came in weaker than expected and the numbers for March were modestly revised lower. The consensus expectation was for April starts to come in at the seasonally adjusted 969K annualized pace, below March’s one million rate where they had reached for the first time in 5 years. But Starts actually came in at 853K and the March tally was revised down to 1.02 million from the originally reported 1.03 million. The negative surprise notwithstanding, the current Starts level represents a significant improvement over the year-earlier level. We should keep in mind, however, that Housing Starts still remain below the roughly 1.3 million level considered ‘normal’ for the U.S. housing sector (Starts were above 2 million during the bubble).

On the positive side, Building Permits came in better than expected, crossing the one million mark for the first time in 5 years. The surge in Permits assure that building activity should maintain the positive momentum in the coming months. We saw this in the April homebuilder sentiment index as well. The index, which came out Wednesday, showed an improvement for the month after stalling out over the last few months.

The construction and broader housing industry remains the economy’s brightest spot, helping offset weakness from the factory floor and headwinds resulting from fiscal tightening like the payroll tax increase and the budget sequester. This morning’s earnings miss from Wal-Mart (
(WMT - Free Report) ) is a timely reminder that these fiscal drags are having an impact on consumer behavior even though we haven’t seen much corroborating evidence in economic data at this stage.   

The tone of this morning’s data is negative, but this need not be a big problem for the stock market. In the convoluted logic of looking at every piece of economic data from a Fed-inspired prism, soft economic data provides good-enough justification to double down on stocks. Will we see the same trend play out in today’s trading session as well? We will find out soon enough.

Sheraz Mian
Director of Research


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