For all of you in and around Boston and Waco, I certainly hope you and your loved ones are safe today. In addition to the unexpected tragedies there, last week also delivered the worst market week since last June (down 2.1% in the Dow and S&P 500). Despite this decline, I noticed that many high-dividend stocks were gobbled up on almost every dip. In addition, many companies that surprise Wall Street with strong first-quarter sales and earnings are being rewarded. This is the "flight to quality" I've mentioned.
Gold and Silver Collapsed due to a Strong Dollar and near-Zero Inflation
Last Monday, China announced that its first quarter GDP officially slowed to a 7.7% annual pace, down from a 7.9% annual pace in 2012's fourth quarter. Since China is the commodity-gobbling monster that consumes the lion's share of most industrial metals - as well as a rising share of the world's gold - that unexpected news set off a panic selling of gold, silver, copper, and several other commodities.
The gold market bottomed out in overseas trading early last Tuesday morning. The bottom, for now, turned out to be $1,321 gold and $22 silver, but then physical demand picked up around the world on Tuesday, putting an end to gold's slide, at least for the time being. Physical gold demand soared Tuesday as many bullion dealers reported the strongest demand all year. Gold sales also picked up in Asia.
I don't believe you can blame a statistically insignificant slowdown in China for the sell-off in gold. That sounds more like an excuse to sell rather than a logical reason. First off, China's numbers are not that exact to begin with, and any decline of such a small percentage is essentially meaningless, but I guess the world had to blame the decline of gold on something, so the pundits decided to blame China.
I've got a different explanation. Commodities are falling mostly due to a strong dollar and low inflation. Due to Europe's continuing financial crises and the rapid inflation of the Japanese yen, the U.S. dollar is temporarily the strongest of the "big three" currencies. A surging U.S. dollar puts downward pressure on most commodity prices. That's why the Labor Department announced on Tuesday that the Consumer Price Index (CPI) fell 0.2% in March. (Excluding food and energy, the "core" CPI rose just 0.1%.)
Due to a stronger dollar, energy prices declined 2.6% in March, led by a 4.4% decline in gasoline prices. Apparel prices also declined 1% in March. A strong dollar tends to make imports cheaper and makes our exports less competitive. The good news for stocks is that a softer CPI and slower economic growth will likely give the Fed the ammunition it needs to keep its money pumping policies in full effect.
Fears of a Global Slowdown Should Lead to Continued Money Pumping
Despite China's "slowdown" from 7.9% to 7.7% annual growth, China's industrial production rose at an 8.9% annual pace last quarter, while its retail sales rose at a 12.6% annual pace vs. the same quarter last year. Frankly, I believe any talk of a China slowdown is nonsense. We should be more worried about a German recession. On Tuesday, Germany's ZEW's economic sentiment indicator, a gauge of investor confidence, plunged to 36.3, down from 46.5 in March. The ZEW's current conditions index also declined to 9.2 in April, down from 13.6 in March. When mighty Germany stalls, it sends a warning sign around the globe.
After the German announcement, we saw renewed concern about a worldwide economic slowdown. I think these concerns are overblown, but this certainly gives the Federal Reserve and other central banks plenty of reasons for continuing their monetary easing policies. On Tuesday, New York Fed President William Dudley said that the Fed's current pace of bond purchases (i.e., $85 billion per month) remains "appropriate" given the lack of substantial improvement in the labor market and continued low inflation.
In that light, the most fascinating news last week was the statement that came out of the group of G-20 finance ministers and central bankers that met in Washington D.C. last Friday. In saying, "Japan's recent policy actions are intended to stop deflation and support domestic demand," they seem to support Japan's unprecedented speed and volume of money pumping. Their approval might encourage other countries to follow Japan's example. I am shocked that the G-20 is encouraging Japan's relentless money pump, since other countries are watching Japan carefully and thinking about boosting their own money supply.
Stat of the Week: Industrial Production Continues to Rise in the U.S.
The economic news released last week was mostly positive. In addition to low CPI inflation released last Tuesday, the Fed reported on Tuesday that industrial production rose 0.4% in March. More important, the February growth rate was revised up to 1.1% (from 0.8% previously reported). The March surge was due largely to a 2.6% rise in automotive production. First-quarter automotive output rose 13.2%, while the demand for appliances, carpet, and furniture rose 4.3%, fueled in part by the rise in housing starts.
On Tuesday, the Commerce Department reported that March housing starts rose 7% to a seasonally adjusted rate of 1.04 million, the highest annual rate since June 2008. Housing starts remain below the peak of almost 2.3 million units in 2006, but it is clear that the housing market is steadily recovering.
The news was not so cheery on Thursday, when the Conference Board announced that its leading economic index [LEI] declined 0.1% in March. This was definitely a disappointment, since economists' consensus estimate was for a 0.2% rise. Five of the ten LEI components fell in March: (1) consumers' expectations, (2) building permits, (3) new manufacturing orders, (4) weekly manufacturing hours, and (5) weekly jobless claims. Despite this setback, the LEI has risen 1.6% in the past six months, compared with only a 0.1% gain in the preceding six months, so overall, the underlying trend remains positive.
This week's most closely-watched statistic will be our first look at first-quarter GDP, released this Friday. Many economists expect a return to a healthy 2.5% to 3.0% annual growth rate in 2013. We'll know the details on Friday, and I'll give you my full analysis here again next Monday, as April draws to a close.
Disclaimer: Please click here for important disclosures located in the "About" section of the Navellier & Associates profile that accompany this article.