United We Stand


“Contre nous de la tyrannie l’étendard sanglant est levé.” – La Marseillaise (French national hymn)

Stocks took a beating last week, finishing ominously at their lows for the week on Friday. That could be a harbinger of further losses between now and Thanksgiving, as some weakness is typical this time of the year, but the reality is that we are probably going to be trading in a fairly narrow range until the end of the year.

Weak earnings are undermining the stock market – with 34 S&P 500 companies left to report, the third quarter is currently booking a 1.8% year-on-year decline – but earnings weren’t otherwise the reason for last week’s decline. Stocks were overbought anyway and the chart pattern that had pushed the usual earnings-season rally an extra week past its typical expiration completed its trip back to resistance levels that every trader was watching. It was very much a garden-variety seasonal decline.

With seven weeks left in the year, markets are entering a period of strong seasonal influences, with the Thanksgiving-to-year-end upward move (give or take a day or two on either end) one of the strongest patterns the stock market has. The economy and earnings still matter, but are more background influences that can be difficult to model. This year doesn’t seem to have a strong prevailing wind from either the economy-earnings side (feeble) nor the monetary policy side (ditto), so I expect the overall result to be fairly tame, no doubt with some volatility here and there along the way – Fed meetings, jobs reports and so on. In other words, trading items that could lead to some swings, but something very dramatic will have to happen to get the market out of its range.

I don’t include Friday’s horror show in Paris as being on the list of “very dramatic” market-movers, as tragic and historic as they were. Although futures sold off in the immediate wake of the tragedy, they did not do so convincingly and by Sunday night were very nearly unchanged. Financial markets have never been any good at figuring out what such events portend, and in the absence of large-scale physical destruction have rarely reacted much. Indeed, the classic historical pattern is immediate knee-jerk selling (this is not good) followed by even stronger knee-jerk buying, partly out of bravado and defiance (yet we shall overcome). I was already seeing speculation over the weekend that any sell-off might be a buying opportunity, as such an event would surely induce further accommodation from central banks. That kind of perspective would certainly vanish in the face of a sustained outbreak of high-profile terrorism, but we are not there yet and let us hope that we don’t arrive.

With that in mind, I expect the focus of this space for the rest of the year will be on buttressing the case for the business cycle being nearly over. All things being equal, however, I don’t expect markets to start to worry about it seriously before 2016. There is still plenty of time to prepare to get out (or at least take a much more defensive stance), and indeed I think it more likely than not that stocks will finish the year somewhere near their highs. Be prepared for some bumps along the way, however – this is not 2013, and while the Middle East is ever a source of tension, the region is the most fractious it’s been since the 1970s, a most miserable decade.

The Economic Beat

The report of what was a relatively quiet week was October retail sales, clocking in with another anemic gain of +0.1% (seasonally adjusted). Excluding autos, sales were up 0.2%, while excluding autos and gas, they were up a more respectable 0.3%.

The growth rate in sales has been weakening steadily all year, and the trailing twelve-month growth rate is now down to 2.4% (unadjusted). Historically, rates descending to this level have come either just before a recession or in the early stages of one. Falling gasoline prices do play a role, but the money isn’t being spent elsewhere at the retail level; sales growth excluding autos and gasoline is also declining to weak levels. Some argue that spending is just fine and that lots of money is simply being spent elsewhere, such as in health care, but the annual growth in personal income and weekly earnings has also hovered around the same 2.4% level as retail sales growth. It’s not a coincidence. Although the October jobs report looked good, it was mostly low-income jobs and nearly all of the gains in the employment rate are in the rear-view mirror. November retail sales are not off to a great start.

October sales were the punctuation mark to a week of feeble data. Import-export prices reported monthly declines of 0.5% (imports) and 0.2% (exports) for October, with the annual change now standing at a whopping (-10.5%) for imports and (-6.7%) for exports. Excluding petroleum, import prices are still down 3.4% over the last year. The producer price index isn’t much better, with a monthly decline of 0.4% and a year-on-year decline of 1.6%. Excluding food and energy, producer prices are up a grand total of 0.1% over the last year.

Wholesale sales also continued their weak trend. Pundits tend to follow the inventory levels for clues to GDP, but inventory builds that come from falling sales are not the kind of boost that one wants for GDP. This category is definitely saying “recession”, because sales have comped negative every month this year through September, and the trailing-twelve-month growth rate is now the trailing-twelve-month rate of decline, down three months in a row and now at (-1.9%) unadjusted. The inventory-to-sales ratio is still too high at 1.3 (adjusted) and implies a negative inventory contribution for this quarter’s GDP.

The labor turnover report (JOLTS) was mixed. Boosters will tell you that job openings rose to 5.5 million in September – why, that’s nearly 20% higher than a year ago! Realists like me point out that hires were down slightly from August AND are down slightly from a year ago (seasonally adjusted): 5.049 million in September 2015 versus a year-ago 5.061 million, with a September rate of 3.7% vs. a year-ago 3.8%. As noted above, the employment gains for this cycle are nearly over.

The week of November 16th will lead off with the New York Fed manufacturing survey, a report that has been mired in negative territory for several months. It will be followed on Tuesday by industrial production, the consumer price index (CPI) and the homebuilder sentiment index. The last item always precedes housing starts the following day, but the real report of market interest on Wednesday and indeed for the week at large comes that afternoon in the form of the latest Fed meeting minutes. It’s strictly trading stuff.

Thursday has the release of the Philadelphia Fed business survey, which has also declined of late (September-October). Kansas City reports on Friday, but most eyes will be on Wednesday’s Fed minutes and the hopes of finding some fool’s gold of clues and reasons that the Fed might not hike in December. From an investor point of view, you’re better off thinking about corporate profits.

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