“He that can have patience can have what he will.” – Benjamin Franklin (ed.), Poor Richard’s Almanack
Last week was hardly a banner week, though it could have been worse and was even encouraging for bulls in some respects. The S&P 500 stands barely positive and the Dow barely negative on the year, but the Nasdaq is still higher, along with the Russell 2000. You can expect some attempts to mark prices up on Tuesday for the end of the quarter, followed by some further seasonal weakness for the first half of April, but really the markets have held up well considering the lack of good news.
To begin with, earnings growth is expected to be negative in the quarter. That isn’t news, but the estimated decline for the S&P 500 as a whole has been relentlessly marked down, all the way to minus 4.6%. That suggests that even the usual 300-basis point cushion that is built into estimates isn’t going to be enough to pull the quarter into the black (it certainly leaves some room for upward surprises, though).
In the second place, economic releases have been weak, jobs apart, for some time now. Given employment’s status as a leading indicator, that could be ominous indeed, but I do expect activity rebounds in the second and third quarters, from both the weather and the inventory mini-cycle. Much of the blame for Wednesday’s plunge was blamed on a surprisingly negative report for durable goods, but much of it was also due to a front-page Wall Street Journal article that morning questioning whether bio-tech stocks were at bubble levels, said stocks subsequently taking quite a beating (oddly enough, the Journal did not refer to the article the next day). The weak durable goods report did take the Atlanta Fed GDP tracking estimate (not deadly accurate, it must be said) for the first quarter down to 0.2%.
Throw in the usual post-meeting pushback by Fed governors that rate increases are indeed the other way than what you thought (had the stock market sold off the previous week on tightening fears from the FOMC statement, the same governors would doubtless be running around saying increases might not come this year), calendar weakness and it’s no surprise that markets gave up a couple of percentage points. With valuation levels so high, it’s a testament to the calendar and the stickiness of momentum that stocks aren’t taking a more serious beating this quarter.
In fact, there should be some good times ahead, though I will probably have to remind everyone of that again in a couple of weeks’ time, when the usual early April weakness has the indices all sitting in the red. Retail spending hasn’t been as weak as the monthly retail sales reports would have it. Some sectors, such as health care and financials, are expected to have strong positive growth, and you can easily guess how much attention that will get. There is always a first-quarter earnings rally, no matter how bad the economy, such that the indices could follow their April lows with a five-percent-plus move upward. The credit markets are roaring along at record levels with corporate and junk-rated bond issuance, so more buyback and M&A news is in the pipeline that will help prop up prices for the final leg of the bull.
Oh yes, it most likely will be the final leg, but take heart. While I freely admit the impossibility of knowing market tops and bottoms even a week in advance – not to mention a month afterwards – the best base case I can presently make is that stock prices won’t peak for good before the fall. Stock prices have begun the long topping formation that accompanies the end of bull markets (N.B. – not every topping formation ends a bull, but every bull has ended that way in the last forty years), but the good news is that such episodes are measured not in weeks but in months, about nine to twelve on average, and the top is most unlikely to be in already. So my best guess is this fall, though there is a lot of time for events (and a pusillanimous Fed) to move that target.
More peek-ahead predictions for you: One is that this spring, there will some real fear that the bull is over. Episodes of doubt about the bull have been periodic in recent years, but this one is apt to give rise to some serious doubts. The second is that later in the year, we will see new all-time highs for all of the indices, along with predictions that the economy has finally reached escape velocity and not a little boasting about the U.S. markets and economy. Remember that every hill has a top, because the coming one is set to be the peak of this cycle.
The Economic Beat
Due to its seemingly outsized impact, we’ll start with durable goods as the report of the week. It suffered on several accounts, the first being that new orders were much lower than expected, both overall (-1.4% total, vs. expectations for a gain of 0.7%, seasonally adjusted) and excluding transportation (-0.4% vs. consensus for +0.3%). The previous month’s figure were also revised downward by a hefty amount (2.0% from. an initial 2.8%). Shipments, which go into the measurement of GDP, were weak again, down 0.2% after a 1.4% January decline. Both shipments and new orders have been down four of the last five months. A first revision to February will comes Thursday in the factory orders report.
The unadjusted data was better on a monthly basis, but not year-over-year. The first estimate for February has negative comparisons with February 2014 – itself an anemic month – in overall orders, orders excluding defense, and orders from private business cap-ex spending. Shipments are still up on a year-to-date basis. The data highlight the apparent weakness of capital goods growth outside of the energy sector, with both the Richmond and Kansas City regional Fed manufacturing surveys showing negative diffusion rates in their March releases.
February home sales appeared to make progress, but some caution is in order. The existing home sales rate rose slightly to 4.88 million units (seasonally adjusted annual rate), taking the year-on-year comparison up to 4.7%, but with very soft months for comparison. New home sales appeared a little better with the first two back-to-back months of a 500K+ run rate since 2008 (539K in February, seasonally adjusted), but the sample sizes are small and some of the unadjusted initial estimates look suspect to me. I expect a downward revision to February to accompany next month’s release.
Fourth-quarter GDP was updated again with a very small revision to nominal GDP that left the real rate unchanged at 2.2% (seasonally adjusted, annualized), the four-quarter nominal rate at 3.7%, 2014 nominal GDP at 3.9% and real GDP for the year at 2.4%. There was no change in nominal GDP in 2014, with the slight improvement in real GDP due strictly to a lower price deflator. The Chicago Fed’s national activity index weakened with negative readings for February (-0.11), a downward revision to January (now -0.1) and the 3-month moving average slipping into negative territory. The economy is off to a slow start in the first quarter, make no mistake, and anecdotal evidence about business has been on the grim side. Yet that could turn any weather rebound into another replay of the febrile hype that gripped markets last summer.
Next week will bring the sacred jobs report on Friday, the highlight of what will be a very busy week for data, and one of the rare instances the report is released when the markets are closed (for Good Friday) but government offices are open.
The week will lead off with personal income and spending on Monday, followed by pending home sales. There are some big activity surveys, beginning with the Dallas Fed on Monday, the Chicago index on Tuesday and ending with the national manufacturing survey (ISM) on Wednesday, which will also see the ADP payroll report and February construction spending.
Besides being the last day of the quarter, and thus prone to unusual trading, Tuesday has the Case-Shiller home price index, while Thursday brings international trade. All U.S. markets will be closed on Good Friday, April 3rd.