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Market Insights

Market Insights: October 12, 2015

Economic Outlook:  In The “Comfort Zone”

  • U.S. consumers have apparently found sweet the spot that country artist Brad Paisley popularized in his hit, Southern Comfort Zone.
  • Bloomberg calculates a metric called the Consumer Comfort Index. It closed September at 44.8. This is now back up to a level where the index stood during most good economic periods since the measurement was started in the early 1980s, such as the late 1980s and mid-2000s. The only time it has been higher was leading up to the millennium, when it soared to the mid-60s. The lowest level it ever reached was late 2008 when it plummeted to about 25.
  • The U.S. consumer seems to be feeling OK with things and indeed seems to be purring along at a good pace, certainly not exhibiting behavior that points to an economic slowdown. A few recent data points bear this out.
  • Same store retail sales were up +0.8% year over year for September. This beat analysts’ expectations. Mortgage applications are strong, as we’ve discussed in connection with the housing date over the past couple of weeks.
  • The consumer is confident enough to be using credit. Consumer credit increased $16 billion in August. This is up, albeit at a slower pace than earlier in the year. Revolving credit and non-revolving credit likewise increased.
  • Overseas, the trend is slowly unfolding in a similar direction. Mario Draghi commented last week that the ECB’s Quantitative Easing plan is actually working better than expected. The ECB is seeing lower borrowing costs, increasing volumes of credit, and better access to credit by small businesses.
  • Industrial production in the UK surprised to the upside, after two months of softening numbers. German and Spanish production pulled back some in the most recent month.
  • Trade data released last week also points to strong demand in the U.S. The numbers for inflation-adjusted merchandise imports rose 3.1% month over month for August, and stand at +6.8% compared to a year ago.

Equity Markets:  Buffet Wisdom (Not Jimmy)

  • A reminder of the famous Warren Buffet quote is apt this week: “I will tell you how to become rich. Be fearful when others are greedy. Be greedy when others are fearful.”
  • We asked the question last week at this time: is a “melt-up” possible? It would be premature to make a definitive call, but apparently some investors became greedy in the last week as the market was gripped with fear. Last week was a strong rebound for equities generally. All the talk around the weak Jobs report of week before last has now faded in the dust.
  • By the way, for all the gloom and doom over that Jobs Report, there was little notice of a release by the Gallup organization of their Jobs Creation Index the same week. It reached the highest level in seven years.
  • In fact, the eight days ending on Friday of last week are one of the steepest rallies for world equities in the past four years.
  • European and Asian markets both enjoyed strong gains. European equities have enjoyed six straight days of advance.
  • Emerging markets were up 7.0% for the week. Even emerging currencies are rebounding.
  • For the technicians – the S&P 500 Index re-crossed its 50 day Moving Average on the upside, perhaps to the consternation of those who were so fascinated by what might prove to be a short-lived Death Cross.
  • A couple of interesting observations from down in the weeds. The smallest 50 companies in the S&P 500 produced double the return of the largest 50. The stocks hit hardest during the recent correction have enjoyed the biggest rebound. These are encouraging signs for further market advance.

Fixed Income Markets & the Fed:  Reading Between The (Fed) Lines

  • Last week, the yield on the 10 Year Treasury note recovered a bit. At the end of the week, the yield on the 10 Year closed at 2.09. This is up from the previous week’s close at 2.01%.
  • Minutes from the Fed’s September meeting were released last Thursday. A read of these supports those betting that higher rates are postponed into 2016. That weakens the dollar and boosted energy, raw-material and industrial companies amid expectations that a weaker U.S. currency will lift profits of U.S. multi-nationals.

The Week Ahead

Wednesday

  • U.S. Retail Sales

Thursday

  • Initial Jobless Claims
  • U.S. Consumer Price Index

Friday

  • U.S. Industrial Production