“The dizzy dancing way you feel.” – Joni Mitchell, Both Sides Now
In last week’s column I opined that based on the options positions heading into Friday the 21st (April’s expiration date), the S&P 500 should finish at or around the 2350 level. More specifically, the key level was 235 on the SPYder ETF, or SPY, the most liquid and heavily traded market ETF. In the event, the SPY closed last week at 234.57 and the index at 2348.69, so we can safely say: mission accomplished.
It wasn’t necessarily preordained, of course, as major political events can swamp the determination (and more importantly, pocketbooks) of the options dealers to um, balance out their positions. But while we were treated to more frets about North Korea, China, the administration, and the impending French election, there was nothing concrete enough to overwhelm the traditional business of separating customers from their money.
Now that the very late expirations date is behind us, the spring rally is finally free to get underway. It should run until the end of April or so, even into early May given the late start. Despite the multiplication of warnings from experienced traders and managers, the market will do what it usually does – claim it’s all justified, prices aren’t too high, the expansion will run forever and so on. Add on the true believers in the magic of tax cuts, which seem to spark another rally every time that they are mentioned and we should soon hit new highs in all the averages.
Once the spring rally has run out of steam, however, we could see a correction that gives it all right back. Earnings are running about as expected, not really more despite the usual quarterly exclamations that earnings are beating estimates (the average in recent years has been about 70% of reporting companies). The economy is not going great guns (look for next week’s release of first quarter GDP to come in at about 1%) and when the employment train slows, it will get ugly. I expect both to happen this year.
The Economic Beat
In a week dominated by earnings and political worries, the economic release of greatest interest was the industrial production report for March. In short, actual measures of activity remain on the other side of the field from qualitative surveys dominated by a stubborn belief that the miracle of big tax cuts will happen soon and fix everything. Everything.
While the overall index did increase by 0.5% (seasonally adjusted, or SA), it was all down to an 8.6% increase in utility usage, the largest in the history of the index. March was indeed on the cold side, but not wildly so – the big change owed more to an unusually mild February. Outside of utilities, manufacturing output was off by 0.4%, led by slowing car production, and is now up a grand total of 0.8% year-on-year, despite all of the regional manufacturing surveys that have been showing very elevated readings for several months. The total index is up 1.5%, led by utility usage and the mining category, in this case oil.
The surveys were another story. The New York Fed survey reading shrank to 5.2 from 16.4 (zero is neutral), a change that the people at Econoday actually praised as “thankful cooling,” while enthusing about the “burst of factory strength all year in the Northeast.” The strength has unfortunately been mostly in the survey readings, with little to no discernible change in real output. In a similar vein, the latest Philadelphia survey also narrowed considerably from 32.8 to a still-strong 22.0, but the latter should not be taken as correlated with changes in activity, but changes in expectations in what is about to happen. One survey that conspicuously has not followed the bubbly results from the more established ones has been the Markit Economics series. Its latest “flash” purchasing manager composite reading for April came in slightly from 53.2 to 52.7. It’s not much of a change and still above 50, but well off the elevated readings seen in older surveys.
The housing market remains expansionary, which is about what you would expect with an economy operating at full employment on top of a housing sector that has very gradually recovered from its biggest-ever bubble (and crash). The pace of existing home sales picked up to an estimated 5.71 million rate (SA) in March from 5.47 million in February. The homebuilder sentiment index stayed quite strong with a reading of 68 (50 is neutral), and while housing starts in March did ease in the first estimate to a 1.215mm rate, February was revised upward to 1.303mm. The variance is likely all weather-related. As for employment, claims are still quite low and are pointing to a good April jobs report. Strictly speaking, the two aren’t quite equivalent, but claims do carry a lot of weight in the estimation process.
The highlight of next week should be Friday’s release of Q1 GDP. It should come in around 1%, give or take a couple of tenths, which will occasion much complaining that it can’t be true because, well, just look at that stock market go. That darn first quarter, you know, they just can’t get it right. But there hasn’t been anything in consumer spending or capital investment data to indicate otherwise – perhaps government spending can bail it out? Look at the Chicago Fed national activity index on Monday for a clue, along with the March durable goods orders and shipments that will be released the day before.
There’ll be more regional industrial surveys coming, from Dallas (Monday), Richmond (Tuesday), Kansas City (Thursday), and Chicago (Friday). Housing will round out the month with price data on Tuesday, followed by new-home sales, and then pending home sales on Thursday. Other reports of interest are the international goods report on Thursday and the employment cost index on Friday.