Week in Brief: February 20

February 20, 2015

Last week's economic data came in well below expectations. Existing home sales fell to nine-month lows. Dropping in every part of the country. In fact, January existing home sales came in at a 4.82 million annual rate versus consensus of 4.95 million and the last-month's 5.07 million. Higher interest rates appear to be impacting home affordability.
 
There was a bit of positive data: The Chicago Fed Index revealed that January's economic growth picked up slightly. The index's three-month average was essentially flat, which means that growth in economic activity remains above its historical trend and that inflationary pressure from next year's economic activity should be modest.
 
Last week's excitement over a Ukrainian cease-fire was short lived as eastern Ukraine saw a escalation in violence on Sunday. Reports suggest that Russia is moving troops and armor into eastern Ukraine near the port city of Mariupol. Now considered a likely target for the next separatist offensive. The Ukrainian military reported that villages east of Mariupol had been fired on. So, basically, cross the Ukraine cease-fire off your list of good things that happened last week, too.
 
Combing through the headlines, however, the global picture is looking up. The U.S. economy, while not super robust, continues to expand. As evidenced, in particular, by improving jobs data. The eurozone continues to slowly improve. As does the Japanese economy. And a couple of big emerging markets like India are growing. China, the 800-lb gorilla in the room, continues to merely stabilize.
 
The central issue for the U.S. economy remains housing. Starts and mortgage applications fell last week. Hitting their lowest levels since 1996. Even lower than 2010, a horrible year. It's hard to see how the U.S. economy can truly achieve maximum potential, defined as the level at which it can be the locomotive for the rest of this sluggish world, without the housing sector being on top of its game.
 
Balancing the global news against U.S. developments, it appears as if S&P 500 earnings will continue to weaken this year. As they did in Q4 last year. Evercore cut its estimate for total S&P 500 earnings for 2015 to $122 from $127 three weeks ago, and cut it again to $120 last week. The biggest drag remains energy companies. Though multinationals like Caterpillar, McDonald's, and Microsoft are all contributing to the picture of an economic cycle expanding at a slower pace than usual.
 
Don't fret. Stocks can still be successful. However, success will likely entail owning stocks and bonds of real value, or picking the proper geographies. As opposed to just throwing darts.

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