“If that’s all there is, my friends, then let’s keep dancing.” – Lieber-Stoller, Is That All There Is
It’s about this time of year that I write what has become an annual ritual about hopes floating higher. The springtime phenomenon of exaggerated aspiration based on a calendar and stock market that seems to promise better things is an old one that gets more entrenched every year: If the rest of the month holds up, April 2013 will be the eighth one in a row to show a gain.
This year does seem to be a bit different in tone, after back-to-back surprise disappointments in the March jobs and retail sales reports. A year ago, the record warm weather had the press awash in excited talk about “escape velocity,” a phrase that has been conspicuously absent recently. The market isn’t much different: at April 12, 2012 the SPX had logged a year-to-date price gain of 10.3%; on April 12, 2013, 11.4%.
A good question is whether they will end much differently. Last year saw a tough correction – as usual – over the May-June period, followed by the usual rallies over August-September (even in 2008) and Thanksgiving-New Year’s Eve. It’s become fashionable of late to claim that the late spring correction is too anticipated to happen this year, though such complaints were difficult to find going into the rally periods. They replicated themselves right on schedule.
One might wonder why the first quarter posted another double-digit return at all, given that earnings estimates have come down steadily throughout, to the point that income growth is estimated (though not actually expected) to be negative. The start of the season wasn’t all that auspicious, with all three major companies – Alcoa (AA), JP Morgan (JPM), and Wells Fargo (WFC) – reporting year-on-year revenue declines.
It’s a fair question also to wonder why the market was up last week too, given the weak reports and lack of help from earnings. I keep repeating it – it’s just a seasonal trade. The mid-week pop that came around the Fed’s latest minutes was just based on a permission slip to keep going, as there were no revelations published. Traders know the rally isn’t earnings-based or discounting some glorious second half, as the talking heads on television plead. It’s just a momentum trade that needs the ground underneath to shift in order to be derailed.
The candidates for derailing the train don’t include earnings. They’re the calendar, central bank actions, geo-political surprises such as war, or anything that causes the fixed-income trading desks to freeze up. Earnings do matter eventually, as does the economy, but they tend to matter more when they are going up. Corporate profits declined throughout 1998, but the tech bubble was just getting underway.
I would expect more of the same through next week. Monday is the deadline for taxes (have fun), usually an up day, and Friday is the expiration date for April options, also an up day more often than not. There are a lot of earnings coming out too, but that isn’t going to affect the group that shows up to buy after the volume dies down every morning, then reloads every afternoon. They’re here for a little bit longer. Then the float will start to descend.
The Economic Beat
Both the highlight and surprise of the week on the economic front was the March retail sales report. The consensus estimate had been for no change in headline sales, which I had derided as excessively cautious, though I knew auto sales would be down slightly. By Friday morning, the last estimate I heard for ex-auto sales was 0.3%-0.5%, which was where I stood. After all, March had included Easter, always a shopping positive, and the Redbook weekly chain-store report had indicated a 0.8% monthly gain.
We were all wrong. The number might be revised upward, of course, but after both January and February were revised downward, that action doesn’t seem to be the odds-on favorite. The headline seasonally adjusted number was (-0.4%), the ex-auto number was (-0.4%), and the ex-auto, ex-gas number was (-0.1%).
The numbers did suffer slightly from a widening in the gap between the February and March seasonal factors. One or two categories were alright on a seasonally-adjusted basis, notably furniture stores (+0.9%) and miscellaneous retailers (+0.7%). But it was still a weak report, despite some of the emails I received trying to tell me it wasn’t.
It was. The year-over-year change for first quarter sales was only +2.8%, not much above the rate of inflation and the smallest such increase since the 2009 drop. The only other first quarters weaker this century were the recession years of 2001 and 2002, which were between 1.5% and 2%. It was the fourth weakest number since 1993, and close to recessionary territory. It doesn’t qualify as such, or make one inevitable, but it is worrisome.
The revision to February also took that month’s year-year gain down to less than one percent, the weakest year-on-year reading since December 2009. Some of that is due to the unusually warm weather in February 2012 that made for an exceptional month, and makes for a difficult comparison. The same goes for March and the first quarter. They’re still weak numbers, though, and while I would be ordinarily be inclined to wait for second-quarter comparisons to wash out the weather effect, we now have the sequester to deal with, and it’s only beginning to bite.
The data were consistent with each other last week, if not the market’s rise. The Michigan sentiment number plunged again, to 72.3 when 79 had been expected. It’s been volatile lately, but the trend seems to be around 75. Small business confidence also zigged the wrong way, falling a point to 89.5. That lines up with the unexpected decrease in February wholesale inventories, which fell 0.3% seasonally adjusted. Year-on-year wholesale orders actually declined, and the rolling 12-month total, while still showing a gain of 3.75%, is steadily falling towards zero. The unadjusted inventory-sales ratio is the highest in three years.
Lack of economic strength showed up in pricing statistics, too. Import-export prices both fell in March, and the year-on-year categories are weak. Oil prices were higher a year ago, which accounts for much of the change, but outside of food exports most categories are weak. Producer prices were also weak in March at (-0.6%), similarly pulled down by energy, being up 0.2% ex-food and energy. The year-year rate is stable at 1.7%.
Jobless claims continue to zigzag crazily, and fell back to a 346,000 rate seasonally adjusted. Seasonal factors could continue to be problematic for the headline number in coming weeks.
The FOMC released its latest meeting minutes, and there was really nothing at all new in them. The fact that QE withdrawal is apparently not imminently upon us was all that a mid-April market needed to float higher.
Next week the focus shifts to housing, industrial data, and first quarter earnings. The first category starts off with the homebuilder sentiment index on Monday, followed by housing starts on Tuesday. March will be another tough annual comparison, as the weather was on the cool side. Revisions are often large.
In the manufacturing area, we’ll get the New York Fed survey on Monday, Industrial Production on Tuesday and the Philadelphia Fed survey on Thursday, which also has leading indicators. I’m not sure any of it will mean as much to the market short-term as Friday’s options expiration.
Earnings get underway in earnest, and it will be interesting to see if the markets vary from their pattern of rallying in options week regardless. After JP Morgan and Wells Fargo reported declining revenues on Friday; too-big-to-succeed Citigroup (C) gets a crack at it on Monday. Bank of America (BAC) rounds out the gang of four on Wednesday.
Tuesday includes Coca-Cola (KO), Goldman Sachs (GS), Johnson and Johnson (JNJ), and Intel (INTC).
Besides B of A, Wednesday includes American Express (AXP) and EBay (EBAY). Thursday has Morgan Stanley (MS), Phillip Morris (PM), IBM and Microsoft (MSFT), the last under pressure from reports of steep drops in PC shipments.
Friday will see GE, Honeywell (HON), and McDonald’s (MCD).