“It’s been a long cold lonely winter.” – George Harrison
For those of you accustomed to seeing my column on Saturday mornings, my apologies – a weekend of college revisits began with a 4AM wakeup on Saturday and didn’t finish until late Sunday afternoon. Apart from disaster movies and the 1986 World Series, I don’t think I have ever seen so many scared-looking middle-aged people gathered in one place before.
As the stock market finished a decidedly downbeat week, the Friday topic of debate naturally centered around What It All Means, it being the selling that has taken the averages into the red on the year. One camp called it a healthy pullback, and thus a buying opportunity; another rather more smug group consisted of I-told-you-so bears; and perhaps the largest group was those nervous undecideds hovering between the first two. Then there was the comic-fringe group wanting to blame it all on tax payments (blaming the government being one of Wall Street’s most cherished traditions), though such things come up every year at this time. The argument that taxes are responsible for bringing down stocks, on the other hand, only comes up on those rare occasions when stocks are below water in April.
If you are Jerome Siegel and investing with a fifty-year horizon, last week’s turbulence was indeed a buying opportunity, but then again, so is every other week. If you are Jeremy Grantham and working with a seven-year horizon, the drop isn’t nearly enough to be a buying opportunity. Nor was it for a day trader, and certainly not for the average retail investor either. However, you short-term traders should be sharpening your pencils.
The January turbulence in equities was a warning sign, and so has been the recent rotation out of high-beta stocks into low-beta issues. Those are tremors, though, not the actual earthquake, which will come later – the fault lines are spreading.
But the big one won’t come in the spring, as I have often said. It’s just not the time of year for them (though Vladimir Putin may have other ideas). One can later look back at certain springs and say, “that is when the bull started to tremble,” but there is always a first-quarter earnings rally, and bull markets don’t come apart all at once – there are always counter-rallies. They have only plunged straight down on one infamous occasion, in October of 1987, a one-day decline that has since been legislated out of existence by the exchanges. The selling should exhaust itself sometime this week, exactly when depending on whether we get there all at once or in stages.
At some point this week (unless developments in the Ukraine intrude) it should be a good time to start edging back in on the long side. It will be a trade though, because bigger trouble is lurking in the latter part of the second quarter. Few companies have reported earnings so far, but it’s clear from JP Morgan’s (JPM) conference call that business conditions are still not robust. Expectations are low, with consensus estimates around plus or minus one percent. But those estimates are designed to be beaten, and the first quarter is too early for companies to throw in the towel. A little more selling this week and both technicals, the calendar and estimates will be in your favor. You should be able to take your cue from Monday’s pre-open release of March retail sales.
Just remember – it’s only a trade. One other thing to remember – all U.S. markets are closed on Friday, April 18th (Good Friday) and many European markets will be closed on Monday, April 21st (Easter Monday).
The Economic Beat
The key report of a very light week was the latest release of the FOMC (Fed policy committee) minutes. Many seemed to take them as a reaffirmation of dovish bias, or perhaps just a guarantee that the Fed would ride to the rescue whenever needed. The Fed looked uncertain from my point of view, sort of trying to have its cake and eat it too (we want to taper, but you know we could change our minds. We will raise rates someday, but maybe that will be far off in the future. Or not). It also looked like some trial balloons were being floated, such as the notion of no longer reinvesting principal payments from maturing securities. In sum, a new chair and a changed policy committee are finding their way, and it will probably be some time before things settle in.
The February labor turnover report (JOLTS) did not reveal any extra momentum in the job market. On a seasonally adjusted basis, hires were up slightly from February 2013, while the hire rate was slightly down (3.3 vs. 3.4). On a non-adjusted basis, job openings were up year-on-year (2.9% vs. 2.7%), though manufacturing was down sharply (1.9% against 2.4%), and hire rates were the same at 2.8%. I counted 13 instances of the phrase “little changed” in the release. which just might be a clue.
Wholesale sales revealed that the inventory-to-sales ratio for February was provisionally estimated at 1.335, the highest rate since May 2009 (1.353) if it stands up. The twelve-month rate of change for sales edged up to 4.26%, still in the same range of about 4% that it’s been in since September. The high levels of inventory are something of a worry, but the end of the quarter usually cleans enough of it out that it would be premature to draw any conclusions yet.
Weekly chain store sales had a decent pickup over the week that crossed into April, though the year-on-year comparisons will suffer from the shift in the Easter holiday. Rising temperatures should help the latest week, and while much of the country will return to cooler weather as we get closer to Easter, the holiday itself should help things keep moving.
The report that was probably the most widely quoted – while simultaneously being completely unanalyzed – was weekly jobless claims. Where is Mark Haines when we need him, may he rest in peace? I can well remember the former anchor of CNBC’s “Squawk Box” (the morning show) constantly reminding market Panglosses in 2007 that employment is a lagging indicator. Employment will keep growing after a recession has already started, and keep shrinking for many months after a recovery has begun.
It should be noted that while many are boasting about the “lowest number in 7 years,” the number was a tiny bit flawed. The previous week had been blown up by another California vagary, so it may be better to average out the last three weeks to get a read on the real trend. The four-week average of unadjusted claims was lower as recently as last summer, and there is also the not-insignificant matter of revisions: Once upon a time, the first week of September 2013 was below 300,000 on an adjusted basis (294,000), and is now given as 307,000, though the actual number of claims was unrevised – only the adjustment factor changed.
The ends of the first and third quarter are usually the lightest times of year for claims, so it may well be that last week’s number gets revised later on as well. But the most important aspect of a number that people wanted to put so much weight on is that claims always peak just before a cyclical downturn – it’s virtually a tautology. The last time that claims descended to this level as a percentage of workforce was the spring of 2007. They continued to gently decline into October, and then at almost the same time as the S&P 500 was making a new high, began to reverse. They didn’t stop going up the summer of 2009.
The spring of 2000 followed the same pattern, peaking in October. So what the claims data may be telling you is that a couple more good quarters lay ahead of us before the business cycle will start to contract again. Cycles just don’t last forever – except, perhaps, in the outlooks of equity mutual fund managers.
The week ahead could very well pivot on the Monday morning release of March retail sales. As we go to press, consensus is for something close to 1% (seasonally adjusted) with autos, and about half of that without them. The last week of March did indeed improve, but chain-store sales reports the rest of the month were not pointing to strength in the ex-auto, ex-gas category. If the report does match or beat consensus, the selling in the market may reverse, but I confess to a bit of skepticism that it will. The Chinese trade data disappointment last week (declines in exports and imports) fanned our own equity market sell-off.
However, guessing government reports is a very chancy business – one can be spot on and not find out until a month later (or more) when the revision comes out, and seasonal adjustments are always a wild card. Once again, better to wait and see.
The rest of the week is full of market-sensitive data. On the manufacturing side, the Federal Reserve and its regional branches will report the New York manufacturing survey on Tuesday, March industrial production on Wednesday, and the Philadelphia manufacturing survey on Thursday.
Housing will start another monthly round of reports with the homebuilder sentiment index on Tuesday and housing starts on Wednesday. The Fed’s Beige Book comes out that afternoon. The consumer price index comes out Tuesday, and the latest read on producer inflation Friday showed a big monthly spike (0.5% overall, 0.6% excluding food and energy). Leading indicators come out Friday, but the financial markets are closed in honor of Good Friday (banks and government offices will be open).