This week’s economic releases were, on balance, positive. Particularly when it comes to what matters most in the U.S.—the consumer, whose spending activities account for two-thirds of the GDP calculation, and the services sector, which accounts for 80+ percent of the economy and provides 80+ percent of all employment.
Yes, I’m very bullish on the U.S. economy, near-term (beyond Q1′s results of course). But while I wouldn’t say that I’m necessarily bearish, I’m not so sure the near-term picture is all that rosy for the U.S. stock market.
Confused? Since the economy ultimately drives earnings, how is it that one who’s “very bullish” on near-term economic prospects isn’t feeling the same with regard to near-term stock market prospects?
Well, for starters, I can indeed make a near-term bullish case for the U.S. market, which I may as well do now:
My bullish near-term case for stocks would be that the estimates for Q1 corporate earnings have been so underwhelming that companies are likely to beat them to a greater extent than the market is currently discounting. That the sectors that benefit most from lower energy prices, such as retail and transportation---and the beleaguered financial sector, whose earnings are expected to show impressively in Q1 against stock prices that are in the red year-to-date---may pull the rest of the market back into record territory when earnings season is all said and done. Plus---speaking very near-term---April has historically been the very best month of the year for the stock market.
Okay, so here's why I'm not-so-sure about the U.S. market, near-term:
For starters, "not so sure", means how it sounds---I don't have a strong bearish commitment. So, let's go with "cautious".
My cautious near-term case for the U.S. market comes from the understanding that stock prices anticipate the future. And the fact that the S&P 500 is currently trading at a price-to-(2015) earnings ratio that---should inflation peek its tiny head above the surface and bond investors leave the very crowded room---would be somewhat rich in my view. Particularly when recent reads on corporate productivity are going in the wrong direction. I.e., labor costs are increasing faster than output. Which---unless companies raise their prices (inflation), or find ways to become more productive (capital investment)---means reduced profit margins: Not a good thing should we have to discount future cash flows with higher interest rates to determine where stocks are valued.
Of course there are myriad more cases, positive (I can make a strong case that capital investment is poised to pick up [which is a longer-term positive], for example) and negative, to be made for the market's prospects, but there's lots more I want to share this week. So we'll leave this short-term prognosticating on this all-important (so much so that I'll bold it) note:
The wonderful news is that you and I are long-term investors. Right? (say "yes!"), which makes virtually everything I just typed utterly mute. I'm simply attempting to shape your perspective as 2015 unfolds and remind you of who you are (a long-term investor. Right? Say "yes!").
The minutes from last month's Fed meeting were released this week and, in my view, barring economic deterioration beyond Q1---which, per the above, I'm not anticipating---it's clear that the board's intent is to bump up the fed funds rate sometime this year. In last week's update I linked to another commentary where I made the case that the market may greet the beginning of the "normalization" process unwelcomely.
That said, the Fed's plan is to signal and soften it like of a son-of-a-gun---so as to mitigate any potential negative market reaction. And they just may pull it off---but I'm skeptical.
Read last week's comments on the Fed for more...
$49.14 was the price of a barrel of West Texas Intermediate Crude (WTI) as I typed last week's update. At this moment it sits at $51.77. Comments out of Iran, a declining U.S. rig count and a huge inventory build, among other things, made for an extremely volatile week in the oil market. At one point WTI was pushing $54 a barrel.
Here are my comments from this week's economic log:
THE EIA PETROLEUM STATUS REPORT continues to bolster my pessimism over the price of oil, having surged by another 10.9 million barrels last week. Inventories remain at an 80-year high. This phenomenon will eventually come to an end as cutbacks in production will ultimately provide a floor for the price. The timing, however, is difficult to call. While some credible experts see the bottom forming this quarter, others point to coming increased production out of the gulf of Mexico, more potentially from Libya, and the prospects for a nuclear arms deal with Iran that would allow the country to export in much freer fashion than it can currently, as perpetuating the downward pressure on the price. The futures curve shows WTI in barely the mid-50s by year-end.
The consumer is a huge bright spot for economic prospects going forward! Last week's Bloomberg Consumer Comfort Index hit a nearly 8-year high. Respondents expressed optimism over the current state of the economy, the buying climate and their personal finances (see the April 7 notes below).
Retail sales continue to improve. Here's from this week's log:
THE JOHNSON REDBOOK RETAIL REPORT continues to confirm my optimism over consumer activity in 2015, up 3.4% year-over-year---firmly in expansion mode. The month-over-month increase came in at a very strong 1.3%. I believe that's the fourth consecutive week of 1%+ montly gains. My optimism aside, we must keep in mind that this year's early Easter probably bolstered this number.
I remain optimistic on housing. Here's from the log:
MORTGAGE PURCHASE APPS continue to bolster my enthusiasm over the housing sector, having surged for a 3rd straight week, up 7%. Up 12% year-over-year.
Last week's employment stats came in mixed. Which was to be expected given what we're seeing coming out of Q1.
As I've charted for you the past couple of weeks, the Eurozone economy's recent performance strongly confirms the optimism I hold for the region---which I began expressing late last year. This week's indicators---from Spanish unemployment, to the Purchasing Managers Indices, to German factory orders---all imply that the Eurozone is, for now, moving in the right direction.
In terms of the Eurozone as an investment destination, it's in a vastly different near-term position than is the U.S.: While the U.S. Central Bank is trying to figure out how to begin withdrawing stimulus without upsetting the applecart, the European Central Bank is stimulating like mad. While U.S. companies, in the aggregate, are sporting record profit margins, Eurozone companies, in the aggregate, are not even halfway there. While the U.S. economy has been in, albeit tepidly, expansion mode for several years, the Eurozone economy is just now appearing to find its legs. And while the U.S. stock market has, in my view, largely discounted an improving economy, the Eurozone market is just beginning to believe.
Last week I suggested that Chinese authorities are in no mood to miss their 7% growth objective for this year.
Here's from this morning's Bloomberg China update:
China Premier Li Urges Acceleration of Railway Spending
(Bloomberg) -- China must enhance railway construction in central and western part of its country to help economic growth, Chinese Premier Li Keqiang says.
- Reiterates target of spending 800b yuan on railway infrastructure in 2015, goal of putting at least 8,000 kms new railways into use this year
- All government departments must support railway construction
- Greater efforts must be made to attract private capital for railway investment
The Stock Market:
Note that while the U.S. (the Dow and S&P that is) is finally inching into the black, non-U.S. markets have delivered strong year-to-date results. As I've preached for years, emerging markets hold the greatest growth potential, however, we go somewhat lightly for most clients due to the extreme volatility inherent in developing economies. Two weeks ago VWO (our proxy ETF for emerging markets) was barely positive on the year, by .33%. As of yesterday it was up 9.42%---that's what I'm talking about in terms of both growth prospects and volatility.
Here’s a look at the year-to-date results for the major U.S. indices, and non-US indices using index ETFs as our proxies (according to Bloomberg):
Dow Jones Industrials: +1.95%
S&P 500: +2.69%
NASDAQ Comp: +5.89%
EFA (Europe, Australia and Far East): +8.91%
FEZ (Eurozone): +7.64%
VWO (Emerging Markets): +9.42%
Here’s a look at the year-to-date results for a number of U.S. sector ETFs:
IYH (HEATHCARE): +9.34%
XHB (HOMEBUILDERS): +7.10%
XLY (DISCRETIONARY): +6.62%
XLP (CONS STAPLES): +2.91%
XLB (MATERIALS): +2.69%
XLK (TECH): +2.18%
XLE (ENERGY): +1.92%
XLI (INDUSTRIALS): +1.15%
XLF (FINANCIALS): -1.62%
IYT (TRANSP): -3.96%
XLU (UTILITIES): -4.68%
Once again, here's the reminder on volatility I posted earlier in the year:
In last weekend’s commentary I attempted to put a rough January into proper perspective by urging you to view the stock market as an “antifragile” (benefits from stress) entity. Again, periodic market downturns are an essential aspect of the long-term investing process. As I stated in our year-end letter, and several commentaries since, I expect financial markets in 2015 to exhibit the kind of volatility that will challenge the resolve of many a short-term investor. Good thing you and I think long-term!
One additional note on volatility: The past couple of weeks I’ve shared with you the very short-term results for markets and sectors. I do this with a bit of hesitation, as I in no way want to give the impression that you, nor I for that matter, should base our long-term investment decisions on short-term movements in markets or their sectors. It can, however, serve as a reference point for how the markets are, or are not, responding to the data (which is why I, as a professional, track the short-term). As you may have noticed, my beginning of the year optimism over non-US and the housing sector (to name two), and pessimism over utilities, appears to be justified by recent results. I need to strongly (very strongly!) emphasize that I was not predicting what we’ve experienced these few short weeks into 2015. My optimism or concerns are based on factors such as valuations, trends, monetary policy and cyclicality—and my comfort in making allocation recommendations rests on the view that our clients are not short-minded investors (it can take awhile, if at all, for the market to reward what I believe to be good fundamental logic) who mistakenly believe that any human being possesses a capacity for market timing. Some people get lucky from time to time, but without exception, market timers are wrong far more often than they are right. The path to long-term investment success is fraught with bumps and potholes. The ones who successfully make the journey take it slow and never over-compensate when steering through and around the inevitable obstacles along the way.
The Bond Market:
As I type, the yield on the 10-year treasury bond sits at 1.95%. Which is up noticeably from last week's 1.84%. As I stated week before last , I see bonds in general sporting a risk/return trade-off that makes going out on the yield curve not worth the risk.
Here are last week’s U.S. economic highlights:
APRIL 6, 2015
MARKIT SERVICES PMI came in at a strong 59.2, the highest reading since August 2014. Markit's respondents have been more upbeat than comparable surveys from other firms. THE COMPOSITE PMI posted a strong 59.2 as well... Despite the strong reading and what it portends for Q2, confidence going forward waned a bit. Per Markit's senior economist's commentary:
" The lastest survey highlights a strong underlying pace of US economic growth moving into the second quarter of 2015. New business trends across the service sector have picked up especially sharply from the lows seen earlier in the year, and job hiring has strengthened as a result.
However, service providers' business confidence dipped in March and remained well below the peaks recorded in 2014, weighted down in part by the prospect of a Fed rate rise later this year. Meanwhile, subdued input price pressures were reported in March, although the overall rate of cost inflation has ticked up slightly from a recent five-year low."
THE FED LABOR MARKET CONDITIONS INDEX, which is derived from 19 indicators, which is heavily weighted to the unemployment rate and private payrolls, weakened in March, to -.3. No doubt March's surprisingly weak jobs number measurably impacted the index.
THE CONFERENCE BOARD EMPLOYMENT TRENDS INDEX softened a bit in March, but remains 5.6% higher year-over-year. Here's the CB's director of labor market research:
“The growth in the Employment Trends Index slowed down in the first quarter of 2015,” said Gad Levanon, Managing Director of Macroeconomic and Labor Market Research at The Conference Board. “The combination of the disappointing March employment report and the recent weakness in the ETI suggests that the likelihood of a slowdown in employment has increased. Even so, it is unlikely that job growth in the second quarter would fall much below the trend of 200,000 jobs per month.”
THE ISM NON-MANUFACTURING INDEX came in just under February's reading, 56.9 vs. 56.4 (flat, essentially). Overall, the report shows continued strength in the service sector going forward (at an albeit slower pace, on balance)---with the business activity component declining vs. Febraury's results (57.5 vs 59.4), the employment component came in basically flat relative to February (56.6 vs. 56.4) and the new orders component showed a better month-over-month number (57.8 vs. 56.7). Here's from the report, note the optimism in the respondents' commentary:
"The NMI® registered 56.5 percent in March, 0.4 percentage point lower than the February reading of 56.9 percent. This represents continued growth in the non-manufacturing sector. The Non-Manufacturing Business Activity Index decreased to 57.5 percent, which is 1.9 percentage points lower than the February reading of 59.4 percent, reflecting growth for the 68th consecutive month at a slower rate. The New Orders Index registered 57.8 percent, 1.1 percentage points higher than the reading of 56.7 percent registered in February. The Employment Index increased 0.2 percentage point to 56.6 percent from the February reading of 56.4 percent and indicates growth for the 13th consecutive month. The Prices Index increased 2.7 percentage points from the February reading of 49.7 percent to 52.4 percent, indicating prices increased in March after three consecutive months of decreasing. According to the NMI®, 14 non-manufacturing industries reported growth in March. The majority of respondents’ comments reflect stability and are mostly positive about business conditions and the overall economy."
The 14 non-manufacturing industries reporting growth in March — listed in order — are: Management of Companies & Support Services; Real Estate, Rental & Leasing; Accommodation & Food Services; Transportation & Warehousing; Agriculture, Forestry, Fishing & Hunting; Arts, Entertainment & Recreation; Retail Trade; Finance & Insurance; Public Administration; Information; Wholesale Trade; Professional, Scientific & Technical Services; Health Care & Social Assistance; and Construction. The four industries reporting contraction in March are: Mining; Educational Services; Other Services; and Utilities.
WHAT RESPONDENTS ARE SAYING ...
"Business remains strong this month." (Health Care & Social Assistance)
"Current business conditions are positive and the outlook for 2015 is on track this first quarter." (Finance & Insurance)
"See tremendous increase of business activities due to increase of capital investment, sales efforts and competition for human resources." (Professional, Scientific & Technical Services)
"Some increase in activity related to pre-construction season spending for budgeted capital projects." (Public Administration)
"Business slightly increasing year-over-year, but about the same as last month." (Retail Trade)
"Lower fuel prices improving overall profits, but do not appear to be lowering freight costs." (Transportation & Warehousing)
"Fuel costs continue to remain low; however, suppliers not willing to give back on fuel surcharges or to reduce fuel cost components of transportation." (Utilities)
"Overall business is continuing to expand for 2015." (Wholesale Trade)
APRIL 7, 2015
THE GALLUP ECONOMIC INDEX showed its first negative reading of 2015, -2 vs. 1 in February. Makes sense given Q1's struggles.
THE JOHNSON REDBOOK RETAIL REPORT continues to confirm my optimism over consumer activity in 2015, up 3.4% year-over-year---firmly in expansion mode. The month-over-month increase came in at a very strong 1.3%. I believe that's the fourth consecutive week of 1%+ monthly gains. My optimism aside, we must keep in mind that this year's early Easter probably bolstered this number.
THE JOLTS (JOB OPENINGS AND LABOR TURNOVER) REPORT showed little change from January, with 5.133 million openings vs. 4.998 million in January... The number of hires, separations and the all-important quits (higher when the economy's growing, in that it denotes optimism that one can find a better job elsewhere) rate all came in very close to January's number.
CONSUMER CREDIT grew by $15.5 billion in February. Which, on its face, suggests confidence on the part of the consumer going forward. However, when we look below the surface we find a $3.7 billion decline in revolving credit (as a financial planner I like that, although [short-term] that's negative as a barometer of consumer confidence). The non-revolving component, rising $19.2 billion, is bullish when we're talking auto loans, but not so much when we're talking student loans (the number reflected increases in both).
THE IBD (INVESTORS BUSINESS DAILY)/TIPP (TIPPONLINE) US CONSUMER CONFIDENCE INDEX jumped notably in March, 51.3 vs. 49.1 in February (over 50 denotes optimism)... The survey points to a stark contrast among the states, with respondents from the heavy oil producing states not feeling so great right about now, vs. those in other states who are benefiting measurably from lower energy prices.
APRIL 8, 2015
MORTGAGE PURCHASE APPS continue to bolster my enthusiasm over the housing sector, having surged for a 3rd straight week, up 7%. Up 12% year-over-year. Refinances, however, declined 3% last week, after having increased nicely the two prior weeks...
THE EIA PETROLEUM STATUS REPORT continues to bolster my pessimism over the price of oil, having surged by another 10.9 million barrels last week. Inventories remain at an 80-year high. This phenomenon will eventually come to an end as cutbacks in production will ultimately provide a floor for the price. The timing, however, is difficult to call. While some credible experts see the bottom forming this quarter, others point to coming increased production out of the gulf of Mexico, more potentially from Libya, and the prospects for a nuclear arms deal with Iran that would allow the country to export in much freer fashion than it can currently, as perpetuating the downward pressure on the price. The futures curve shows WTI in barely the mid-50s by year-end. Gasoline inventories rose by .8 mbs adn distillates declined by .3 mbs.
APRIL 9, 2014
THE BLOOMBERG CONSUMER COMFORT INDEX jumped again last week---to a nearly 8-year high. Respondents expressed optimism over the current state of the economy, the buying climate and their personal finances. Here's the release:
Consumer Comfort in U.S. Climbs to Highest Level Since May 2007
By Victoria Stilwell
(Bloomberg) -- Consumer confidence increased last week to an almost eight-year high as Americans viewed the U.S. economy in a more favorable light and said it was better time to spend.
The Bloomberg Consumer Comfort Index climbed to 47.9 in the period ended April 5, the highest level since May 2007, from 46.2. A measure of buying conditions was the strongest since November 2006, while attitudes about the economy were the brightest in nine weeks.
The pickup in confidence could signal a rebound in demand, fueling an economy that softened in recent months under the strain of harsh winter weather, a strengthening dollar and tepid global growth.
Persistent job-market progress and faster wage gains will help to further boost sentiment and spending, which accounts for 70 percent of the economy.
The sentiment index’s “advance is buttressed by other recent indicators, including strong car sales, rising mortgage applications, gains in new- and existing-home sales and a five-month high in manufacturing, even as March jobs data disappointed,” said Gary Langer, president of Langer Research Associates LLC in New York, which produces the data for Bloomberg, said in a statement.
The increase in the comfort index from a week earlier was the biggest since the end of January. The gauge remains well above last year’s average of 36.7, which was the best since 2007.
The measure of Americans’ views on the current state of the economy climbed to 39.5 last week from 37.1 in the prior period, the report showed Thursday. The buying climate gauge, which measures whether now is a good time to purchase goods and services, advanced to 43.8 from 41.3.
The index of personal finances rose to 60.5, the second-highest level since October 2007, from 60.1.
A strong trend in job growth has probably helped lift sentiment. While March payrolls growth was the weakest since December 2013, employment gains have averaged 260,670 a month for the past year, according to Labor Department data.
Wage growth may also be showing some signs of life. Average hourly earnings climbed 0.3 percent in March from the month before, compared with a 0.1 percent February gain.
Sentiment last week climbed in six of seven income brackets led by households making $100,000 or more, whose confidence soared to the second-highest level since August 2007. Those making $25,000 to $40,000 were the only households to experience a drop in sentiment.
On a regional basis, confidence improved in all areas except the Midwest. In the South, sentiment was the strongest since September 2007.
WEEKLY JOBLESS CLAIMS rose last week, to 281k vs 268k the week prior. However, sub 300,000 is a very strong indicator of labor market strength. The 4-week average is 3k lower to 282.2k. Continuing claims, which are reported on a one-week lag, dropped 23k to 2.304 million, which is a new post recession low. The 4-week average for continuing claims was down 27k to 2.361 million. The unemployment rate for insured workers remains at a recovery low of 1.7%.
WHOLESALE INVENTORIES are a troubling sign, as they've remained relatively high for two straight months. In February, inventories rose .3% against a sales decline of .2%. The wholesale inventory to sales ratio sits at 1.29, which is the highest post-recession reading. January's number was revised upward by .1%, while sales were revised lower by .5%. January sales of course reflected plunging oil prices. February, however, saw bigger declines in electrical goods, machinery and metals, all pointing to softness in the manufacturing sector, which I suspect is related to lower exports as a consequence of the rapid pace in which the dollar has advanced.
NAT GAS INVENTORIES rose by 15 billion cubic feet last week, to 1,476 bcf...
APRIL 10, 2015
IMPORT AND EXPORT PRICES in March should embolden those who think it unwise for the Fed to raise interest rates anytime soon. That is, if inflation is the deciding factor... On a year-over-year basis, import prices were down 10.5% and export prices were down 6.7%... Month-on-month, imports were down .3% while exports were up .1%...