The United States stock market hit a record high last week despite mixed reports on the economy.
The Standard & Poor’s 500 Index rose 2.0 percent to 1,614.42 last week, its highest level on record. Stocks rose 2.0 percent over the last two trading days of the week alone, with a strong employment report on Friday cementing the gains.
The employment report from the Labor Department showed that nonfarm payroll employment rose by 165,000 in April. This was higher than the 140,000 estimated by economists surveyed by Bloomberg. In addition, revisions added a total of 114,000 jobs for February and March. The unemployment rate fell to 7.5 percent, the lowest in four years.
However, another report on Friday on factory orders provided a negative signal on the economy. The Commerce Department reported that new orders for manufactured goods fell 4.0 percent in March. While a plunge in volatile civilian aircraft orders contributed to the fall, even excluding transportation equipment, orders fell 2.0 percent.
Reports from purchasing managers surveys earlier in the week had also indicated slowing manufacturing activity. The Institute for Supply Management's manufacturing PMI fell to 50.7 in April from 51.3 in March and Markit's manufacturing PMI fell to 52.1 from 54.6.
Activity in the services sector may also be slowing. Another report on Friday from the Institute for Supply Management showed that its non-manufacturing index fell to 53.1 in April from 54.4 in March.
US economic growth may also be adversely affected by the continuing weakness in Europe. Data last week showed that the European Commission's economic sentiment indicator for the euro area fell to 88.6 in April from 90.1 in March and Markit's eurozone manufacturing PMI fell to 46.7 in April from 46.8 in March.
The European Central Bank did cut its main policy interest rate by 25 basis points to a record low of 0.50 percent after its monetary policy meeting on Thursday though whereas the Federal Reserve announced no new policy measures after its meeting on Wednesday.
In a presentation at the 10th annual Strategic Investment Conference last week, PIMCO Chief Executive Officer Mohamed El-Erian noted “an enormous contrast between the markets and the real economy”. He said that while markets are rallying, developed economies are seeing lower growth due to ongoing deleveraging.
He said that markets are rallying despite weak economic growth because central banks are providing monetary support. And because the weak economic growth is likely to persist, central banks “have little choice other than to continue on their current trajectory”.
Therefore, El-Erian recommended: “Ride the central bank wave.”
However, he also warned that “all waves eventually break”. When the disconnect between economic fundamentals and the markets revert, it is likely to prove “painful for unhedged investors”.
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