Stock Report For Week Ended January 30, 2015
Stocks skid on earnings concerns
Stocks fell for the week, dragged lower by earnings reports and a renewed decline in oil prices. Markets experienced sharp selling pressure as trading began Tuesday morning, and sentiment remained poor throughout much of the rest of the week. The technology-heavy Nasdaq Composite Index outperformed the large-cap Standard & Poor's 500 Index, helped, in part, by the strong performance of Apple. The smaller-cap indexes held up better than large-cap blue chip stocks. Small-caps typically have less reliance on export markets, which are growing slowly and have become more challenging for U.S. firms because of the strong dollar.
U.S. multinationals are facing challenges of strong dollar
The challenges facing U.S. multinationals, particularly those tied to the global economic cycle, played a large role in Tuesday's sell-off. Equipment giant Caterpillar led the Dow Jones Industrial Average lower after offering a disappointing outlook for 2015. The company cited the declining price of oil and other commodities, such as copper and iron ore, which is reducing demand for mining and other production equipment. T. Rowe Price industrials analysts and managers expect revenues in the sector to face continued pressure in the coming months, but they believe that lower prices for oil and other commodities will eventually boost consumer spending and provide a tailwind for industrials stocks.
Several signs indicate the U.S. consumer is growing healthier
Indeed, investors received several pieces of good news about the U.S. consumer during the week, which may have moderated the market's decline. The University of Michigan and Thomson Reuters confirmed their earlier estimates that consumer sentiment had reached its highest level in 11 years, thanks in part to falling gasoline prices. The Commerce Department reported that consumer spending had expanded at a solid annualized pace of 4.3% in the final quarter of last year, although its first estimate of fourth-quarter gross domestic product was 2.6%, significantly less than the 5.0% annual growth in the third quarter.
Household formation surges; rental vacancies fall to lowest in two decades
The week also brought surprisingly good news about the U.S. housing market. T. Rowe Price Chief Economist Alan Levenson notes that the pace of household formation surged in the fourth quarter, which should eventually underpin a pickup in new housing construction. He also calculates that rental vacancies reached a 21-year low, which has put significant upward pressure on rents. While good for landlords, one factor restraining the housing market has been the inability of many potential buyers, particularly younger ones, to qualify for mortgages to purchase a home. The construction of single-family homes has a larger impact on economic activity than multi-unit housing construction..
Urban renewal may offer investment opportunities
Other forces are at work as well, however, and investors may be able to profit from some of them. David Lee, manager of the T. Rowe Price Real Estate Fund, observes that the millennial workforce wants to "live, work, and play" in close proximity to downtown central business districts. This millennial workforce is bolstering demand for downtown office properties, as well as apartment and retail properties in gateway cities. The progress that cities have made in the areas of safety and transportation has fostered this urban renewal, he notes.