“In the summer time, when the weather is high, you can stretch right up and touch the sky.” – Mungo Jerry (Ray Dorset), In the Summertime
Take one average oversold market, add one average job report (so long as it beats consensus), throw in the first week of a new month and you have a good recipe for a rally. Add in an innocuous remark by the Federal Reserve chairman, and you have one of the strongest weekly rallies in recent months (seven, to be exact). Goldilocks is now the belle of the ball.
For another week or two, that is. After that, I fear some Cinderella-like elements will be introduced into the story, and before the end of July I would not be surprised to hear the sound of glass slippers being crushed under the weight of panicky ball-goers fleeing the scene.
I’d like to quote a line from the front page of Friday’s Wall Street Journal that I found apt. Under the banner headline of “Stocks Surge to Fresh Highs” (excepting the Nasdaq, of course), read the explanatory line, “fueled by fresh reassurance that the Federal Reserve would continue to pour cheap money into financial markets.”
If that doesn’t scare you, consider that the back page of the paper’s investing section contained a short column by one of the paper’s dyed-in-the-wool bulls rhapsodizing over a “Summer of Love” for stocks. If you’re on board with that, then I would say don’t get too amorous with your investment money, because a goodly chunk is going to be leaving you soon.
These early-July rallies are common enough, as are end-of-July breakdowns. Whether or not we get the latter this year is no sure thing, no trade ever is. Yet earnings season, which gets going in earnest next week, is unlikely to provide any spark, and is rather more likely to provide anemic results on revenue and net income comparisons again, though perhaps not for earnings per share – they will beat expectations, thanks to stock buybacks and a low bar for estimates. But the season is most unlikely to spark a rally – UPS cut its guidance for the quarter on Friday morning while warning of “a slowing U.S. industrial economy”, and the company is something of a bellwether. The first half of August is just as reliable a downer for equities as the first half of July is an upper.
Equities are already into the upper regions of being overbought, and another percent or two being tacked on over the next ten days or so will take us into nosebleed territory. It’s often the case at this time of the year, and often also the time when full-year estimates start to get a reality check instead. That’s why the market tends to sag towards the end of July in all but the best years. But who knows, perhaps the central bank of China will offer to start buying bonds too.
As for Mr. Bernanke’s remarks, well, he really said nothing new at all. Indeed, he must have been shaking his head afterwards and asking the New York Fed if there was anything goofy in the Manhattan water supply. But his remark happened to come at the right moment, at a time when most of the market moves are happening in big gaps between sessions. The volume of traders trying to be the first to buy or sell has us rushing back up as quickly as we were rushing down. The fact that markets were extended technically in both cases makes it even more evident that this is just trading.
Chairman Ben speaks again this week, giving testimony to Congress Wednesday and Thursday. Given the extreme reaction on Thursday, one has to be prepared for the notion that he will try for a less dovish posture, out of sheer concern for market lunacy. The depth of obsession has reached the point where some are speculating about “two Bernankes,” the official one and the privately more dovish one. Ergo, some more very busy trading could be in the cards.
The labor turnover survey released during the week (on which more below) indicates that hiring is no different this year than last. German industrial production fell unexpectedly, EU industrial production declined (again) as expected, and Chinese oil imports were down for the first six months of the year for the first time since the crisis. The rest of its recent trade data were weaker as well, and this week’s follow-up could be a downside-surprise GDP print. Everyone’s energy costs just shot up from the combination of Egypt and a reversal of the strong-dollar trade, leaving oil traders running wild. For all that, expect to see and hear a lot more nonsense that tries to turn simple trading moves into bold statements about the “robust” strength of the economy.
I’ve an uneasy feeling that we will look back on the current period as the height of misplaced faith in the magical reach of central bank policy. It reminds me of earlier episodes of similar convictions of certainty that went astray – unshakable credit markets (2007), tech stocks (1999), junk bonds (1989). The base case is still the same – don’t fight this rally yet (unless we get an ugly retail sales report on Monday), but don’t fall in love with it either, and watch out for August.
The Economic Beat
The economic news of the week did not come from any official release, but from Bernanke’s response to a questioner that policy accommodation would be needed for a long time.
Two interesting reports for the geek-set included releases of the May data for the JOLTS (labor turnover) survey and wholesale sales and inventories. I wrote in last week’s column that it may be the case that the jobs market isn’t any stronger than it was a year ago, only that the Bureau of Labor Statistics (BLS) estimation methods were likely to have changed after their benchmark revision earlier in the year, which added many jobs to the 2012 totals. The idea is that the department presumably wants estimation methods that makes last year’s raw data produce the revised results. If so, then this year’s raw data may not be any different, with only the estimation methods producing higher (and presumably more accurate) results. The published establishment payroll data backs this view.
So does the JOLTS survey, at least tentatively. The survey showed a slight decline in hire rates from a year ago, of 3.4% in May 2012 to 3.3% in May 2013. The quits rate also declined, and in theory they should rise in a strong market. One doesn’t like to be too definitive about such matters, given the revisions that the data are subject to – for example, the May 2012 hires rate was originally released as 3.3%, and has since been revised up to 3.4%. However, the original May 2011 rate was given as 3.2% and was revised down to 3.1%. so the revisions can cut both ways. So far the 2013 hire rate is running slightly behind the 2012 pace on a year-to-date basis.
The wholesales sales data has been consistent – it shows a consistent pattern every month that the annual growth rate is decelerating. It’s now down to 2.6%, which isn’t much ahead of the inflation rate. That’s a common trend running throughout most of the non-robust economic data, and I will be scrutinizing Monday’s release of the June retail sales data for this tendency. Although the weekly reports for the 4th of July weekend were decent, they didn’t seem so for June. That said, the Commerce Department’s monthly report is often quite different.
Presumably the higher price of gasoline will boost the overall number for sales, though it’s the ex-auto, ex-gas number that the market should focus on. The sharp increase in energy prices last month produced a whopping 0.8% monthly increase in the Producer Price Index (PPI), with the core rate also rising to a mild 0.2%. The consumer (CPI) data is due on Tuesday. One silver lining from the pop in oil prices is not having to listen this summer to the usual group of Wall Street fatheads claiming some nickel drop in the price of gas is going to spur consumer spending. Gasoline futures are at a 4-month high.
Although weekly claims did rise, it’s partly due to the end-of-second quarter effect when layoffs rise and claims in crease for a couple of weeks. The year-on-year pattern appears to be fairly steady.
Consumer sentiment and small business optimism fell slightly, though both are near short-term highs. The surveys have little predictive power.
Retail sales, by contrast, are the third-ranked report after the employment report and FOMC meetings (which don’t even take place every month). The middle of the month is also a time for a heavy dose of manufacturing and housing data – the former includes the New York Fed survey on Monday and the Philadelphia Fed survey on Thursday, with the national Industrial Production report coming in between on Tuesday. Tuesday also features the CPI and homebuilder sentiment index.
Housing starts are due on Wednesday morning, and although it’s too early to draw firm conclusions, the markets will be looking closely at the housing data anyway to see if the backup in mortgage rates has had an impact on the sector. The Fed’s Beige Book comes out Wednesday afternoon.
It’s the first big week for earnings, with a lot of the Dow stocks and other jumbo-caps starting to weigh in. Citigroup (C) reports on Monday, and Coca-Cola (KO), Goldman Sachs (GS) and Johnson & Johnson (JNJ) on Tuesday.
Wednesday has the last of the Gang of Four banks, Bank of America (BAC), along with American Express (AXP), IBM and Intel (INTC). Thursday has Google (GOOG) and Microsoft (MSFT), and Friday sees GE, Schlumberger (SLB) and the expiration of July options.