Market Insights: October 27, 2014
Economic Outlook: Some Decent Foreign Data – For a Change
- Last week represented a somewhat mixed bag on the U.S. housing data. Existing home sales for September rose to 2.40%. The year-over-year change, however, was minus 1.70%.
- New home sales for September came in at an annual rate of 467,000. This is a good indicator. However, it follows a downward revision on the August data which was decreased by 40,000.
- The inflation number for September remains tepid. Both the CPI measurement and the Core CPI measurement increased 0.10% and now stand at +1.70% over the previous year’s inflation number. This is below the target range established by the Fed.
- The initial jobless claim number for last week came in at 283,000. This continues to represent the low end of the range for the last seven years.
- The leading economic indicators from the Conference Board increased +0.8% in September. The key positive components were interest rate spread, labor market improvement, and manufacturing strength.
- Surprisingly, most of the new international economic data releases from last week were positive for a change.
- China reported an increase in GDP of 1.90% for the third quarter of 2014. This makes the year-over-year growth +7.30%.
- According to the National Statistical Office of China, retail sales are up 11.6% on a year-over-year basis ending September 30th.
- The PMI Composite Flash estimate for the Euro-zone posted at 52.2 in September. This represents a pleasant surprise in light of the significant number of weak reports that have characterized the last two to three months.
- Germany showed some acceleration in growth. France, however, continued to show decline. GDP for the UK in the third quarter showed solid growth of +0.70%. The growth in UK’s GDP on a year-over-year basis is 3.0%.
Equities Outlook: A Surprisingly Strong Rebound
- Investor sentiment indicators often serve as good contrary signposts. They are wrong at turning points in the market most of the time.
- Though the U.S. market was up over 4.0% this past week, the Investors’ Intelligence, Bull/Bear Ratio, dropped below 2 to a level of 1.94 last week. This is the lowest ratio in over a year; recall that it was as high as 4.22 just seven weeks ago, before the near-correction in the U.S. equity market. A low ratio in this indicator is a contrary positive indicator for the equity market.
- As we’ve discussed in past weeks, many small cap stocks out-performed their large cap cousins in 2013, and were therefore somewhat vulnerable to under-performance this year. That in fact has played out, as small cap stocks have under-performed most of 2014, and corrected more significantly than large cap stocks.
- As of the market lows (week before last), most of the significant valuation disparities between large cap stocks and small caps have now been corrected. This may indicate that small cap stocks are becoming attractive once again.
- As noted, week before last, the S&P 500 was down 7.40% from its highs at the close on Thursday. On an intra-day basis on Thursday, it reached a point as low as -9.80% compared to its high. This is close to a correction (10.0%) but not quite, and not on a closing basis.
- October is famous as a month that is often difficult in the equity market. The average of all October sell-offs since 1928 is a 4.70% decline. Often, however, these have set the stage for a nice rebound in equity markets. This October, the drop through the low on Thursday, October 16th, was -5.60%. The market rebounded 4.10% last week and we’ll see what lies ahead.
- It now appears in hindsight that the 400 point drop in the Dow on October 16th may have been the climax of this month’s Ebola scare for the market. Based upon a market now priced at about 16 times earnings, we believe equities are very reasonably priced, particularly in a climate of near 2.0% interest rates on the Ten-Year Risk-Free Treasury Note.
Fixed Income Markets: QE Forever?
- The interest rate on the Ten-year U.S. Treasury Note firmed last week to 2.29% on Friday. This is an easing of the “flight to safety” reaction the previous week which sent the yield down to 2.22%.
- Several comments by Fed officials in the past two weeks suggest that the FOMC will go very cautiously in raising rates, so long as the dollar is strong and foreign economies are week. Fed President Bullard went so far as to suggest that the Fed might continue QE at a modest pace rather than terminating it completely, which is expected at the end of this month.
The Week Ahead
- U.S., Durable Goods Orders (Census, Dept of Commerce)
- U.S., S&P Case Shiller Home Price Index
- U.S., Consumer Confidence (Conference Board)
- U.S., FOMC Meeting Accouchement
- U.S., 3Q GDP (BEA)
- EU, Economic Sentiment (European Commission)
- Japan, Household Spending (Ministry of Statistics)
- U.S., Personal Income and Outlays (BEA)
- U.S., Consumer Sentiment (Univ of Michigan)