In Memoriam

“In Flanders fields the poppies blow, Between the crosses, row on row.” – John McCrae, In Flanders Fields

In this condensed, holiday (and last-minute) version of MarketWeek, we’ll quickly review the market’s current animus.

First, the markets remain as obsessed as ever with the next Fed policy move or lack thereof. Most have abandoned all pretense that the move will really matter to the real economy, though some are more discreet than others in public with such sentiment. What matters to the market is that everyone thinks that everyone else thinks it’s crucial to pricing in the financial markets.

Second, the basic trend of stock prices remains up, aided by the release of the FOMC minutes that strongly suggest no June increase is in the offing. Fed chair Janet Yellen’s Friday speech was helpful as well, with its continuation on the one hand of her usual dovish stance – labor markets still have a ways to go, and so the Fed can keep rates where they are – and on the other, standard-issue central bank optimism (“the U.S. economy seems well-positioned for continued growth”) that the data will eventually support such a move.

Third, it appears that S&P 500 earnings for the first quarter will be breakeven after all. With 12 of the 500 companies left to report, the blended growth rate is 0.3%, according to FactSet.

Despite the obsession with Fed policy, zero earnings growth is nevertheless a shaky basis for support. The recent “Goldilocks” gains have their own momentum, true, but also leave the market increasingly ripe for a sharp pullback. However, prices aren’t technically overextended yet on a short- or medium-term basis. The Greek situation is lurching towards another decision fork, which would provide some more volatility (and will in the case of the “Grexit,” or Greek exit).

We are now being told that the real problem with the economy is that the first-quarter is consistently under-estimated, though the pattern of four-quarter growth over the last few years has varied little. Expect the excuses and revised figures to provide further psychological support.

The Economic Beat (in holiday time)

April housing starts were far better than either sentiment indicators or existing home sales (a decline). I’d look for the number to get revised downwards in due time. In the meantime new home sales are due next week.

Business surveys were mixed again, with Philadelphia reporting a mildly positive situation and Kansas City a sharp decline. The Chicago Fed’s national activity index also was negative again, for the second month in a row. Consumer inflation was about as expected – very low, though excluding food and energy it remains steady at 1.8%, providing the Fed cover for policy to do whatever it wants.

Besides the aforementioned new home sales on Tuesday, notable reports also comprise durable goods (Tuesday), pending home sales (Thursday) and the first revision of first-quarter GDP.

I hope all of my American readers enjoyed their holiday weekend, and took at least a moment to reflect upon the sacrifices that inspire the event.

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