Market Insights: October 28, 213
Economy: Sorting through mixed data…
- The delayed release of the payroll report for September showed that job growth is averaging about 143,000 over the past three months. This is a drop-off from the level of the previous months and seems to be showing a bit of a soft spot in the recovery.
- The official unemployment rate is down to 7.2%, though principally because the number of people dropping out of the labor force has continued to grow. If the labor force participation rate was 65% (its level in November 2009), instead of 63.2%, unemployment would be 10%.
- We saw some evidence of slowing economic momentum going into the government shutdown. And the short-term effect of the shutdown is bound to depress the October statistics.
- This kind of data trend makes it increasingly likely that the Federal Reserve, under Janet Yellen, will not be in any great hurry to start tapering the bond purchase program. As Scott Minerd, the CIO of Guggenheim, pointed out this makes higher inflation down the road more likely.
- However, there remains anecdotal evidence of the underlying economic strength: FedEx reports it will employ 20,000 more seasonal employees during the holidays. Airline ticket prices are up about 9.4% from one year ago. Delta Airlines reported that its total passenger-revenue miles expanded by more than 7% over the year-ago level. The Dow Transport Index is solidly out-performing the Dow Industrials over the past 12 months. These data points from the real economy are not indicative of an economy rolling over.
- Spain emerged from recession by posting a slim 0.1% gain in GDP for the third quarter. And the peripheral Euro-zone stock markets are having significant upside moves, signaling that dawn may finally be breaking. Even the lowly Greece stock market is now up more than 25% year-to-date.
- Home prices in China are up 11.3% year-over-year. Chinese factory activity accelerates in October, with the HSBC “flash” PMI reading 50.9 for October, the highest level in 7 months UK auto production is up 9.9% year-over-year in September.
Equities Outlook: What is meaningful and what is not…
- The Investors Intelligence Bull/Bear Ratio rose to 2.68 last week. This is up from 1.96 in the previous week as the percentage of bulls jumped to 49.5% from 42.3%, following the resolution of the budget stand-off in Washington. An increase in the number of bulls is normally a contrarian bear signal, though it is more reliable as a buy signal (when the balance is tilted to the bears) than as a sell signal.
- From a technical standpoint, the S&P 500 last week traded above its 50-day moving average and well above an upward-sloping 200-day moving average. All 10 sectors now trade above their 50-day moving averages, a marked reversal from two weeks ago. This is a positive technical environment for the market.
- As of the middle of last week, almost 30% of S&P 500 companies had reported earnings. Two-thirds are exceeding analysts’ estimates (higher than the 20-year norm). However, in the aggregate, the magnitude of those falling short has out-weighed those beating estimates, though this is skewed by J.P. Morgan’s extraordinary charge to earnings for settlement costs. And only about half are beating top-line revenue forecasts (below the 20-year norm).
- These data points suggest to us that the market may be a bit ahead of itself here, but they may not be enough to suggest we are exposed to potential for a major pull-back. That said, we’ve pointed out before: a correction (10%) can happen anytime and we are, in fact, a little overdue.
- In that regard, the September payroll report may have been a “Goldilocks” report – “not too hot and not too cold”. Just good enough to put aside talk of deflationary threats, but not good enough to cause the Fed to rush to taper.
- Setting to the side the ever-present possibility of a correction, the near term facts are these. The government shutdown and debt ceiling stand-off are over for now. The Federal Reserve is holding 17% of the public debt and is in no hurry to taper down. There is a wealth of liquidity that remains on the sidelines. We remain in an accommodative phase, which is traditionally good for the market.
The Fed and Fixed Income Markets: All this money…
- The Federal Debt jumped past $17 trillion week before last on the first day the temporary suspension of the debt ceiling allowed the government to re-enter the borrowing market.
- Clients keep asking: “Why doesn’t this debt raise inflation and interest rates?” So far, the answer is simple. Despite the increase in the supply of money, the measure of velocity on the money (how fast it circulates) has declined.
- This means that our tepid economic recovery and growth in GDP are simply not creating enough demand for the money created to cause prices and interest rates to escalate.
- While these policies have had beneficial impact on the financial markets, boosting stock and bond prices, the impact on the real economy (jobs, wages, production) seems much more limited. Longer term, we will need to watch for the effects of unwinding this stimulus.
- The risks attendant to this have been very much on our mind in terms of how we are constructing fixed income exposure for clients.
The Week Ahead: A lot data early…
- Monday: U.S. Industrial Production Report, Dallas Fed Manufacturing Survey
- Tuesday: U.S. Retail Sales, Case-Shiller Home Price Index
- Wednesday: U.S. CPI Report, ADP Employment Report