“I had no idea how much nonsense it was, but nonsense it all is.” – Anna Scott (Julia Roberts) in Notting Hill (Richard Curtis)
As it’s a holiday weekend, this week’s MarketWeek will be shortened. But never fear, the good stuff on the economy is still below in the Economic Beat.
The S&P 500 did indeed make a new all-time high on Friday, very closely replicating its performance in the first quarter of 2012. Last year the price of the index moved up 12% in the first quarter, this year it was up 10%. Stock prices did very little after the first quarter last year, though it was quite volatile, and only the rebound on the last day of the year meant that it was positive (barely) over the last nine months.
A similar pattern is quite plausible this year. Historically, when earnings growth has slowed in the late stages of a rally to the point where it’s weak or even negative, the market switches horses and tends to put on a copycat year. In recent decades, this has meant chanting something about Fed magic. It could be anything, so long as enough people are willing to go along.
It won’t be the Fed in the lead this year, as it is already quite extended. Nevertheless, it can still play a strong supporting role. In 2007, markets would consistently rally on the mere possibility of a rate cut. The mood didn’t end until they actually got one. I wouldn’t be surprised to see markets keep rallying in a similar fashion this year, this time on the possibility that the Fed doesn’t end quantitative easing.
The European Central Bank (ECB) has the best chance at playing the lead role this year, as it still has a small amount of room to cut rates. It’s quite possible that it will also wait until a rate cut is too late to do any real good. Unfortunately, the Cyprus solution has put the EU on the track of accelerating the decay of its weaker banks. Among the many analyses that conclude that the EU messed it up with Cyprus are a rather stern one by Ambrose Evans-Pritchard on The Daily Telegraph website, and my own video summary on this site.
The good news is that the problem will take time to manifest itself, though less so on Cyprus itself. The bad news is that like 2007, the failure for disaster to immediately follow will lull markets into a false sense of security. Without a geopolitical event from one of the usual suspects – the Middle East, EU, North Korea – equity prices should move up some more in April, historically the best month of the year for stocks, though one that has seen its share of spring storms in recent years. April will probably see the peak until later in the fall, possibly even for the year.
It depends on which policy decisions are made and which are avoided. The EU prefers to avoid and postpone hard decisions except in extremis – not unlike our own Congress – and so while I say that the Cyprus decision has rung the first exit bell for equities, there is time for the EU to right the ship. There is no indication it will do so until its hand is forced by imminent catastrophe.
I wish a Happy Easter to all, and remind American readers that many European markets close for Easter Monday.
The Economic Beat
The economic data was both mixed and distorted last week. The Chicago National Fed Activity Index had a good news, bad news kind of month with a sharp downward revision to January (from minus 0.32 to minus 0.49), yet a strong showing for February of +0.44. Most of the February rebound came from a rebound in production and the jobs report, which I previously wrote about as suspect. The revisions have been substantial lately, so it’s probably best to wait before making any firm conclusions. The more reliable 3-month moving average fell back to near zero (+0.08) – for now.
Housing had a funny week. Markets bathed all week in the warm glow of the largest year-on-year increase in the Case-Shiller housing index (+8.1% in January) since 2006. This increase is about to fix everything, going by the enthusiasm in the investment orchestra pit. It’s a little disturbing that a widely cited reason for the fix was that Americans will start using the equity in their homes to buy other stuff again. Wouldn’t it better if they were spending out of current income? At any rate, if you look at the longer-term Case-Shiller chart, the rebound isn’t quite so stunning.
The pullback in new home sales got much less attention. That’s the way of a rising market – feed on the good, ignore everything else. Sales fell 4.6% to a year-on-year rate of +12.3% from the approximate 27% y/y increase in January. Last year was pretty balmy at this time, though, so it’s fair to say it’s a tough comparison. Pending home sales also fell, by (-0.4%). There wasn’t much talk about that either.
Manufacturing didn’t have a great week, although you would hardly know it going by the business press. The durable goods result of +5.7% in new orders for February got a great deal of lavish attention. But excluding transportation, the data was a big miss, falling (-0.2%) versus an expected gain of 0.7%. Business investment spending fell 2.7%, though this should be given a little slack in light of the strong January rebound. The Wall Street Journal apparently bit on some hedge-fund propaganda and dismissed the weak February result as inconsequential, dwelling instead on the fact that the three-month moving average has been positive for four months in a row.
Alas, a bit of checking of the source data would have revealed the historical insignificance of the fact. It goes up and down all the time in an era of lean inventory management – it rose for four months in a row in 2008, too, when we had already entered a recession. The annual rate has been steadily following, as my chart at Seeking Alpha demonstrated.
The Dallas Fed business survey was +7.4, better than expectations but below March 2012′s result of +7.9. The Kansas City Fed reported (-5.0), versus +12 in March 2012. The Richmond Fed reported +3 versus a year-ago +7, and the Chicago PMI was about 52 versus a year-ago 62. Does anyone see a pattern here?
Retail sales and consumer sentiment measures were very much at odds. The ICSC survey was pessimistic about March, while Redbook was positive. I think that Easter shopping will help out and we’ll still get a respectable month. As far as sentiment goes, the Conference Board consumer confidence survey fell sharply to 59.7, a low reading, while the University of Michigan sentiment survey rose sharply to 78.6. Go figure. The Bloomberg weekly index fell back to where it was at the beginning of the year.
Personal income rose 1.1% and spending by 0.3% (0.7% before inflation) in February, as the former rebounded from the sharp January drop-off. I didn’t make much of the January decline because of the accelerated bonus and dividend payments in December, and I’m putting February data on the shelf too. A lot of companies paid at least two quarters of dividends in December, some more than that. Many bonuses may have experienced similar patterns. Having any confidence about what the monthly data are really saying could take until well into the third quarter. The data for private wages only should start to normalize with March.
Weekly job claims rose sharply, up 17,000 on top of the 5,000 revision to the previous week, or up 22,000 on an apples-to-apples basis. I’m still trying to figure out the volatility in the California data, and am still waiting for someone at Labor to return my calls.
Fourth-quarter GDP is now officially at +0.4% – for now. It was quite mixed, with spending and imports revised down, and investment spending and exports revised up. It also crucially depends on a sub-normal inflation rate of 1.0%, which I don’t consider realistic. The energy-sensitive measure is likely to see quite a boost in the first quarter.
Next week has three heavyweights – the ISM manufacturing index on Monday, the ECB meeting and press conference on Thursday, and the jobs report on Friday. Last month the ISM (national PMI) survey defied regional weakness to produce an above-consensus result of 54.2. Consensus for March is a cautious 54.0. The non-manufacturing report is on Wednesday.
The consensus estimate for the jobs report is 193,000 as of today, which means that the Street is really expecting another 230K or so, similar to the February result. I’m seeing whisper numbers for something much, much higher, probably as a result of the somewhat suspect claims data. However, if the methodology is similar, it may be right to expect a bigger print. None of the soft indicators from the employment or confidence surveys are backing a big number, apart from the Michigan report. That said, they often diverge substantially from the BLS employment situation. The ADP payrolls report on Wednesday might be a better clue. I thought the February BLS report was flawed, so it may be wise to take the March report with a grain of salt.
March auto sales and February construction spending come out on Monday, with factory orders on Tuesday. Perhaps the latter will bring us an upward revision in business investment spending. I’ll be looking carefully at the latest import data on Friday.