Economic Outlook: Facts and Feelings
- Last week was an interesting contrast between facts and feelings. Said another way, the hard data releases were in conflict with some of the sentiment surveys. Should we believe what people are saying or what they are doing?
- The NFIB Small Business Optimism Index came in pretty strong at 95.9 on the scale. Smaller businesses included in this gauge account for the preponderance of new job creation. It is interesting that almost half of those answering the survey note difficulty finding qualified workers to fill the job openings they have.
- We got a new JOLTS release last week that tracks job openings in the U.S. economy. The current measure of open positions is above 5.5 million, which is a record. This is certainly not indicative of employers who are thinking about hunkering down in the face of an economic downturn.
- David Rosenberg of Gluskin-Shelf made an interesting observation about JOLTS data. The ratio of workers looking for jobs to the number opening has declined to 1.5:1. Back in 2009, this ratio was 7:1. The labor market appears to be tightening or at a minimum, we have a skills mismatch between the available workers and the positions employers are looking to fill.
- So if job openings and small business optimism are near record levels, why would we get a reading of consumer sentiment (University of Michigan Survey) that takes a quick 6-point plunge down to 85.7 on the scale. We have not been at this level since September of last year.
- The Consumer Sentiment gauge was pulled down primarily because a retreat in the “Expectations” measurement, which attempts to measure how people feel on the outlook for jobs and income. This is somewhat incongruous with a record number of job openings in the JOLTS data.
- This will bear watching to see if the sentiment weakness follows up with any softness in actual consumer spending as that data updates. The recent inflation outlook readings ticked slightly higher, which again is slightly incongruous with the sentiment move.
- The foreign economic story continues to unfold. Eurozone GDP was revised up to 0.4% from 0.3% for the second quarter. While that may not sound like a lot, here is a little perspective: If you annualize 0.4% quarterly growth to an annual growth rate of +1.6%, you are practically double the actual GDP growth for calendar year 2014. Markets move on the change in rate more than the absolute number, which is what makes the equity opportunity in foreign markets all the more interesting.
Equity Markets: A Bad Hair Day?
- We’ve all had those “bad hair days”. You feel fine and you are functioning normally, but what is on top simply will not behave. Perhaps that’s a good description of what we’ve seen in the markets over the past couple of months – a succession of bad hair days where prices simply won’t behave.
- Unless you’ve been off the grid for the past two months, you are not surprised to hear that stock markets have been quite volatile. The VIX is the official measure of such volatility and it has remained at a level higher than 20 since mid-August.
- In late August, we saw the negative side. We got the good end of that volatility last week as stocks generally rose ahead of the Fed meeting this week. The S&P 500 Stock Index was up about 2.0% for the week.
- Year-to-date, despite the fact that the economy is feeling pretty good, the equity market has struggled to present much of a showing. The S&P 500 remains negative year-to-date.
- Within the U.S. blue chip universe, Consumer Discretionary and Healthcare companies are the areas of strength. However, these two sectors are the only areas on the positive side of the ledger, YTD. It is no great surprise that Energy companies are the laggards in 2015.
- Foreign developed markets have out-performed on a year-to-date basis compared to the S&P 500 universe.
- We’ve stated pretty consistently over recent months that this market does not appear to be vulnerable to degenerating into bear market territory. That said, the dichotomy in sentiment noted above seems to be reflected in a market which at this moment is somewhat without clear direction. The technical indicators could be considered mixed. It will be significant to see what happens after this week’s Fed meeting.
Fixed Income Markets: Boring Can Be Beautiful
- This has not been an exciting year for bonds. The Barclays Aggregate Bond Index is up 0.5% on a year-to-date basis. Virtually all of the various specific bond indices are flat to up no more than 2.0% for 2015 so far. While not exciting, for those investors with balanced portfolios, the bonds have served to provide a stabilizing anchor to the rough equity currents.
- Last week we got an uptick in the yield on the 10 Year Treasury note as investors jockey for position ahead of this week’s Federal Reserve meeting. However, at the end of the week, the yield on the 10 Year closed at 2.19%. This is up a bit from where it closed the previous week at 2.12% but back within a basis point to where it sat two weeks ago.
- New York Fed President William Dudley said last week that he is focused on the Michigan Consumer Sentiment report (mentioned above) as a gauge regarding how U.S. consumers might be reacting to Chinese-based market turbulence. That data might be ammunition for the doves at this week’s important FOMC meeting.
- The futures market is only forecasting about a 28.0% chance of a Funds rate hike this coming week.
The Week Ahead
- U.S., Retail Sales (Census)
- U.S., Industrial Production (Federal Reserve Board of Governors)
- U.S., FOMC meeting begins (announcement on Thursday)
- U.S., CPI (BLS)
- U.S., Housing Market Index (National Association of Home Builders)
- U.S., Housing Starts (Census, Dept of Commerce, HUD)