Shadows of the Past

“When in danger, when in doubt, run in circles, scream and shout.” – Anon

Well, I wrote last week that Washington would probably be the biggest influence on the market going forward, and our government did not disappoint. President Trump’s abrupt dismissal of former FBI director James Comey last week raised comparisons with the Watergate scandal and former President Richard Nixon’s peccadilloes, and the decision did indeed appear to take his party and most of the White House by surprise. Not to mention the stock market.

This hasn’t ever been a political column and I’m not about to start this week, but I will say that so far as the Street is concerned, it’s probably a picture of the administration’s cart careening all over the road that is most troublesome. Presidents getting into deep political doo-doo have never been good for the market, usually for the uncertainty it brings. In the current case, Vice President Spence is thought to be more solidly conservative than the President (he is certainly better thought of within the GOP), so one might think that the uncertainty issue is less in the fore, and that is partly true. However, a protracted scandal will undoubtedly stall the President’s legislative agenda, above all the sacred tax cuts that Wall Street has been betting on since the day after the election. It isn’t quite certain either that Spence has no involvement in some of the mess – no accusations from this corner, mind you, but both the official media and social media have been alive with doubts, and Wall Street doesn’t like doubts.

The economic news last week was really quite moderate, not too good, not too bad, although doubts about the viability of the retail sector came to the fore last week on the back of a lot of earnings disappointments too numerous to list here. We’re all aware of the dent that online sales have been making in physical stores, but the damage may be coming faster than anticipated. It’s too early to make definitive conclusions, but it can be allowed that the earnings weren’t great. Retail hiring had been a major job contributor this cycle, and there is some cause for concern about the impact on employment going forward.

As for Washington, I fear that we may be at the beginning of a long, drawn-out imbroglio. Certainly the Watergate mess took many months to reach critical mass, even after the first waves of scandal began to break. The current President has a penchant for defiance and by many accounts does not pay much heed to advisors, particularly in times of difficulty. That’s a recipe for more volatility. Given the unfavorable calendar (May-June isn’t a guaranteed down period, but it usually comprises a sizable work-off of spring and even year-to-date exuberance) and the turmoil that looks set to continue in Washington, I wouldn’t be going out on any limb to buy stocks right now. The sellers may be in control for a time, although the market will not entirely give up on the current bull market without firm evidence of economic distress. Still, nearly all of the stock market’s gains over the last 2 1/2 years came on post-election political optimism, and those could be at risk in their entirety if the mess drags on. Valuations are far from appealing, so the sidelines look like a very good place to be right now.

The Economic Beat

The report of the week was the April retail sales report, the last of the monthly high-profile releases. The initial estimate of a 0.4% monthly gain (seasonally adjusted, or SA) was below consensus for a 0.6% gain, with sales excluding autos and gas (+0.3%) also a tad below consensus for a gain of 0.4%.

On the plus side, the growth rate for trailing-twelve-month (TTM) sales (unadjusted) remained on trend, at 3.41% vs. an average of 3.34% over the last six months. March got a big revision upward, from an original estimate of (-0.2%) to +0.1%. Of some concern is that the TTM growth rate for sales excluding autos and gasoline is at 3.8%, marking the third month in a row it has remained below 4%. That hasn’t happened since the summer of 2014. All in all, it wasn’t a bad report, though the late Easter holiday had given hopes for a better April number, with the actual being a disappointment.

The labor turnover report (JOLTS) for March showed the usual result – openings up, hires down, though the latter was by a small margin. Still, it does seem to confirm that growth in employment is continuing to fade out. The hire rate fell to 3.6 from 3.7 a year ago, while openings, though up from February, were actually down slightly from March 2016. The April report may bring better news, as it was a better headline print for jobs. The Fed’s Labor Market conditions index for April was a relatively high 3.5 (0=neutral), but March received an unusually large revision higher, from 0.4 to 3.6. Given the downward revisions to jobs for the month (down to 79,000) and the JOLTS declines on both a monthly and annual comparison, the revision is a bit of a puzzle. Claims, however, maintain a pace of multi-decade lows. It’s partly due to manufacturing being a smaller part of the economy than it once was (manufacturers often employ temporary layoffs to adjust supply) and the gig economy being a larger one, but claims are undeniably low.

Wholesale trade figures for March showed a continuation of the recent improvement trend. Though most of the gains are due to higher oil prices and commensurate increases in production activity, most categories are showing gains over March 2016. TTM sales growth is now up to 2.2%, the third consecutive month of positive growth after nineteen months of decline, also largely due to oil prices. The inventory-to-sales ratio is still on the high side.

Higher oil prices are also steadily raising inflation levels: the latest data for April show producer prices leaping by 0.5% on the month and to 2.5% year-on-year, 1.9% when excluding food and energy. Import-export prices jumped too and are now at 4.1% y/y for imports and 3% for exports, both at or near their highs over the last few years. The surprise was in consumer inflation, steady at 0.2% on the month (perhaps until the next revision) and actually falling on a year-year basis from 2.4% to 2.2%. Although producer price increases should be expected to work their way through the chain, the process can be slow and bumpy, so the Fed still has some room to raise rates.

The coming week is a relatively quiet one, with the Fed’s industrial production report on Tuesday being the most meaningful, though traders don’t exactly obsess over it. Two of the higher-profile regional surveys come into play, with the New York Fed survey on Monday and the Philadelphia Fed edition on Thursday. The housing market index and April housing starts are due Monday and Tuesday respectively. The week is likely to remain dominated by events in Washington.

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