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Market Insights

Market Insights: September 8, 2015

Economic Outlook:  R – E – S – P – E – C – T

  • If the U.S. economy is watching the gyrations in the equity indexes, it is likely singing Aretha Franklin’s lament: “All I’m askin’ for…is a little respect when you come home…” Judging from the market movements, there is nothing worth celebrating, at home in the U.S. economy.
  • The Employment Report was the latest item to garner attention on Friday. Most of the headlines characterized it as unconvincing. On balance, it may have been more solid than it appears at first glance. The headline Unemployment Rate dropped to 5.1%, from 5.3% with a Participation rate that held steady at 62.6%. Average hourly earnings were up 0.3%, which is higher than it has been the past couple months.
  • The new jobs tally came in at 173,000, a bit lower than the expectation of 217,000. There were upward revisions for the previous report of 44,000, however. Also, for some reason, August is the month which typically sees the largest upward revisions as the data firms up later.
  • Below the radar, full-time jobs jumped by 435,000 as U.S. companies move to replace part-time positions. That is a strong expression of confidence in the domestic U.S. economy.
  • PMI’s Manufacturing Gauge came in at a reading of 53 last week. That is a bit slower than prior readings but remains solidly in expansion mode (Markit). ISM’s comparable manufacturing gauge also softened but less than expectation.
  • ISM’s Services Index remained high at 59. This underscores what we have been discussing in recent weeks regarding the strong U.S. services sector and its importance to the economy.
  • The Construction Spending report showed a 0.7% increase this past month, and the previous month was revised up to 0.7% increase from an original +0.1%. (Dept. of Commerce).
  • Despite all the worry about a strong dollar’s effects on U.S. exporters, the U.S. trade deficit narrowed in July by almost 10.0% from the June levels. This was notable because U.S. exports increased more than $800 million compared to June. Like Aretha says, “I gotta have a little respect, just a little bit…”
  • The European picture is also looking respectable. Retail sales for the Euro-zone declined in August but considering that the July retail numbers were revised upward, the August number for purchases exceeded the market consensus.
  • The largest increase was a 1.4 percent monthly jump in Germany. Spain also enjoyed a nice move up at 0.6%, while France saw a 0.2 percent decline
  • Both the Services and Manufacturing flash PMI measurements point to gradually improving conditions in the Euro-zone. Regionally, positive performance showed up in most all the member countries with the exception of France (which at 50.2 is now at a 7-month low).

Equity Markets:  What Next?

  • With a long weekend sell-off last Friday, the S&P 500 is back flirting with its official 10.0% correction level from the highs in May. On a year-to-date basis, however, the U.S. equity market has posted just over a 5.0% loss, including dividends.
  • What happens next? That is — just as it was the week before — the question investors are asking.
  • The danger of the current market degenerating into a bigger true bear market would be heightened if there were significant complacency showing in the sentiment indicators. That’s not the case. Week before last when we hit the lows, the Bull/Bear Ratio declined and the Bear percentage passed 45.0%, a very high level on the historical scale. This is a contrarian indicator that suggests there is not much more downside to go and that all the pessimism is evident.
  • In the face of this pessimism, revenues and earnings for S&P 500 companies are actually near their previous highs on a per-share basis. Growth rates projected for 2016 earnings are more than 10.0%. This is the dichotomy between market behavior and the underlying fundamentals.
  • While you can never completely dismiss the possibility of a major air pocket for the market, it appears much more likely we could feel a major updraft once we get past the September Federal Reserve meeting. That could be true if the Fed defers an increase in the Funds rate, but also if they surprise and increase it, but downplay the importance in their commentary.
  • We get frequent questions from clients on energy stocks. Is this a bottom and a buying opportunity? The answer is could be and maybe. It is probable that buying the major energy producers at these levels will look good in long-term hindsight. The pace at which prices recover is far from certain, however, and could take some time.
  • Though it has not gotten much press, global oil demand has picked up on the lower prices as the energy use contributes to economic growth. China’s July oil demand was up more than 5.0% year-over-year, which is a record high. India showed similar figures. It may take some time, but prices and profits are likely to at least gradually improve.
  • The general situation in foreign markets is not as strong as the U.S. with regard to the market-economy dichotomy. However, it is difficult to make a serious case for weakness.
  • All of this suggests that those with a longer term focus should view current market levels as an opportunity to put money to work, not an occasion to search for the “Exit” sign.

Fixed Income Markets:  “When” More Than “If”

  • The markets are continuing to guess about the “when” more than the “if” in regard to a move by the Fed to raise the Funds rate. As of last Friday, the Fed funds futures were pricing about a 30.0% likelihood of a rate hike at the September 17th
  • The various back-channel comments from Fed governors in the press have sent conflicting signals regarding the likelihood of a move in September.
  • Last week we again saw considerable movement in the yield on the 10 Year Treasury note as investors reacted to volatility in equity markets. However, at the end of the day, the yield on the 10 Year closed at 2.12%. This is just a touch lower than where it closed the previous week at 2.18%.

The Week Ahead

Thursday

  • U.S., Initial Jobless Claims

Friday

  • U.S., Producer Price Index (PPI)