So it looks like the U.S. stock market got it right in 2013 . As I've stated numerously throughout this year, a better U.S. economy in 2014 was necessary to validate 2013's impressive gains. And, yes, the U.S. is indeed on firmer footing as we close out 2014. And as I'll report in next week's year-end letter, the market seems to have digested the 2013 feast quite nicely.
2015 will be interesting indeed. While one would have to stretch to come up with a legitimate case for a bear market-causing recession next year, we shouldn't be surprised if we find the U.S. market suffering a little heartburn when the Fed begins its long-awaited tightening, or, as the Fed prefers, "normalizing" cycle--- I've made the case that the profit cycle is a bit more mature today than it was during past fed-tightening cycles. That doesn't mean that profits can't continue to accelerate going forward as strength in the economy builds on itself, it just means that we can expect a bit more volatility than we've grown accustomed to over the past few years.
Of course corrections, bear markets, extended bull markets or what have you notwithstanding, there's always value to be found in the market. I've been sharing my thoughts on the prospects for non-US stocks going forward, but I'm also seeing some interesting developments (positive and negative) among certain sectors here in the U.S. as well. I'll offer up the details in my year-end letter.
All of us here at PWA wish you and yours a wonderfully Happy New Year!
Here are the highlights from last week's U.S. economic journal:
DECEMBER 22, 2014
THE CHICAGO FED NATIONAL ACTIVITY INDEX FOR NOVEMBER advanced impressively. Here's from the press release:
Led by improvements in production-related indicators, the Chicago Fed National Activity Index (CFNAI) rose to +0.73 in November from +0.31 in October. Two of the four broad categories of indicators that make up the index increased from October, and only one of the four categories made a negative contribution to the index in November.
The index’s three-month moving average, CFNAI-MA3, rose to +0.48 in November from +0.09 in October, reaching its highest level since May 2010. November’s CFNAI-MA3 suggests that growth in national economic activity was above its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests modest inflationary pressure from economic activity over the coming year.
EXISTING HOME SALES came in below the consensus estimate, 4.93 million vs 5.20 million est, and the October number, 5.26 million. This ends five straight months of 5 million plus. Interesting, given the improving jobs numbers and consumer sentiment--not to mention November's decent weather. The good news is that inventory is holding steady at 5.1 months of sales... I expect we'll see better numbers going forward...
DECEMBER 23, 2014
THE ICSC RETAIL REPORT came in at a very strong 3.4% increase over the previous week. And a 3.1% year over year rate... Much better than last week's year over year change of 1.1%. This year's retail season is indeed showing strong growth and speaks to the health/optimism of the consumer...
THE JOHNSON REDBOOK RETAIL REPORT surged to 5.3% year over year growth... Up from last week's positive report of 4.3% growth. Ditto my last comment under the ICSC commentary...
DURABLE GOODS ORDERS dropped .7% in November after increasing .3% in October. This is a big disappointment, as the consensus estimate was for a 3.1% rise. This is consistent with the softening we're seeing in recent manufacturing surveys. Beyond transportation, which fell 1.2% (largely due to a decline in defense aircraft orders), the results were mixed buy mostly down---machinery being the only major industry with a gain.
THE FINAL Q3 GDP NUMBER came in at a very impressive 5.0%. The highest reading since Q3 2003. Consumption surged, adding 2.21% to the total. Despite non-impressive housing results, fixed investment bounced back in the third quarter. Bespoke makes an interesting point in their afternoon commentary:
From 1947 to 2000, private residential fixed investment averaged (through all economic cycles) 4.8% of GDP. It now stands at 3.2%, well off its 2.4% low but still only back to the previous worst all-time reading set in the third quarter of 1982. Getting back to average would mean an extra point of GDP growth at the least. While housing activity continues to disappoint (New Home Sales for November came in at 438,000 versus 460,000 expected and 458,000 previous today), it remains the biggest possible upside risk to growth in the coming year.
CORPORATE PROFITS IN Q3 came in at $1.895 trillion. That's a 5.1% year over year change... Grew at 3.8% year over year in Q2...
THE FHFA HOUSE PRICE INDEX showed unexpected strength in October, .6% vs .2% est. 4.5% year over year, after a 4.4% gain in September...
THE UNIVERSITY OF MICHIGAN CONSUMER SENTIMENT INDEX held steady at a very high 93.6. The expectations component came in very strong and inflation expectations are low... This is a beautiful recipe for growth in retail...
PERSONAL INCOME AND OUTLAYS support the consistent high readings in consumer confidence. Of note is PCE (personal consumption expenditures) inflation coming in at 1.2%, from 1.4% prior... The core, which excludes food and energy, came in at 1.4%, from 1.5% prior. PCE is the inflation measure most watched by the Fed. Clearly, inflation is not yet the excuse to raise interest rates... Here's Econoday's commentary:
The consumer sector continues to improve with gains in income and spending but inflation remains weak. Personal income advanced 0.4 percent in November after growing 0.3 percent in October. The wages & salaries component increased 0.5 percent, following a gain of 0.3 percent the month before.
Personal spending grew 0.6 percent, following 0.3 percent in October.
Strength was in durables which jumped 1.6 percent, following a rise of 0.3 percent in October. Nondurables were unchanged in November after decreasing 0.3 percent the prior month. Services improved 0.6 percent after rising 0.4 percent in October.
PCE inflation continues to be weak-largely due to lower energy costs. Headline inflation posted at a minus 0.2 percent on a monthly basis, following no change in October. Core PCE inflation was flat in November, following a 0.2 percent rise in October.
On a year-ago basis, headline PCE inflation eased to 1.2 percent in November from 1.4 percent the prior month. Year-ago core inflation came in at 1.4 percent in November compared to 1.5 percent in October. Both series remain below the Fed goal of 2 percent year-ago inflation.
Overall, the consumer sector is slowly improving even though inflation is below the Fed's goal. In fact, lower gasoline prices are improving discretionary income and boosting spending elsewhere.
EXISTING HOME SALES came in below estimates at 438k... 460k was the consensus... Overall the November housing readings have been surprisingly disappointing. It'll be interesting to see, against a healthier and happier consumer and relatively positive homebuilder sentiment, how this indicators shapes up next year...
THE RICHMOND FED MANUFACTURING INDEX ---on the surface---picked up this month to 7 from 4 in November. While new orders and shipments were just okay and order backlogs contracted, a solid gain in the employment component speaks to confidence among the regions manufacturers...
DECEMBER 24, 2014
MBA MORTGAGE PURCHASE APPS showed a little growth last week, up 1%... REFINANCES were up 1% as well. I expect to see this data improve gradually going into next year...
WEEKLY JOBLESS CLAIMS fell further to 280,000 last week. The 4-week average is down to 290,250... These are very healthy numbers... Continuing claims, however, rose 25,000 to 2.403 million. The unemployment rate for insured workers is unchanged at a recovery low of 1.8%... All in all, the labor market continues to improve measurably...
THE BLOOMBERG WEEKLY CONSUMER COMFORT INDEX climbed yet again to a 7 year high. The sentiment indicators across the board have been stellar of late. This points firmly to a better US economy heading into next year (the Fed will, I suspect, be inching rates up by midyear)... Here's from the press release:
(Bloomberg) -- Six years into the U.S. economic expansion, the recession in American consumer confidence is finally over.
The Bloomberg Consumer Comfort Index increased to 43.1 in the period ended Dec. 21, its highest level since October 2007, two months before the worst economic slump in the post-World War II era began, according to a report today. The same week, the fewest people since early November lined up at state employment agencies to apply for jobless benefits, other figures showed.
The confidence index blew past its long-term average as a strengthening job market, hints of impending wage gains and the cheapest gasoline in five years help Americans shake off any lingering recessionary blues. The gauge’s eight-point jump over the past three months has been led by improving attitudes toward the economy and buying climate, signaling a retail sales surge will probably extend beyond the holidays.
“It looks like consumers are in high gear heading into next year,” said Sean Incremona, senior economist at 4Cast Inc. in New York. “Better labor market conditions, better support for personal income, gas prices -- we’re really seeing good momentum.”
OIL INVENTORIES surged last week by 7.3 million barrels (and oil prices tanked on the news). Refineries are operating at a strong 93.5% of capacity. GASOLINE inventories grew by 4.1m barrels. DISTILLATES inventory was up 2.3m barrels.
NAT GAS INVENTORIES fell 49 billion cf last week...