Spring Returns

“The air doth nimbly and sweetly recommend itself unto our gentle senses.” – William Shakespeare, Macbeth

Wondering why the stock market closes on Good Friday while banks and government agencies remain open? It’s a tradition that goes back to the early days of our republic, when our immigrant society was overwhelmingly Christian and regular bible-reading was more the norm than the exception. In short, it was thought to be immoral to be trading securities during the anniversary of the hours that Jesus Christ was hanging on the cross. Many thought it best not to do any work at all, and it was common practice to schedule contemplative time during the day that could range from an hour or two to most of the day. Most European exchanges still close for Good Friday, and many countries observe Easter Monday as an official holiday as well.

I confess to finding it a bit out of our own market’s character that it has managed to steadfastly preserve this holiday over the centuries, as over time the stock market has managed to discard every other holiday that wasn’t a federal one. However, this is a column about investing and not religion, so I will refrain from speculation and only note that in keeping with my usual practice, this week’s column will be shorter than customary, but in keeping with the unusual nature of this particular holiday, not quite as short as the other holiday missives.

The principal highlight of last week is probably familiar to you already, namely that the stock market’s weekly winning streak came to an end. Equities are still locked in a mutual embrace with oil, and while the pairing of the two may be closer than good sense would have it, it’s perilous to attack such trends head-on. At some point the correlation will break up and people will write lengthy essays on the foolishness (or wisdom, depending on how the writer or writer’s firm fared with their positions) of it all, but until then it’s risky business to be out of step. The trade will work until it doesn’t.

Other negative factors were at work as well, including yet another slate of mixed economic data that was highlighted by more weakness in durable goods. As is their wont, Fed officials followed up the previous week’s non-tightening move by having its governors fan out to talk up the opposite side of that trade in order to try to keep the market from getting too carried away with the notion of central bank laxity.

Yet for all that, it was a rather decent week for equities. Given that prices had become significantly overbought by the end of the previous week, the ensuing pullback was quite a minor affair. It doesn’t look as if the market should end the month badly either. Though the last day of March is usually something of a struggle, that tendency will have to contend with the uncommon appearance this year of the jobs report the following day. The trading urge to front-run any good news could dominate prices in the current low-volume environment. Though it looks to me as if job market growth is starting to wane, the evidence for that is still more inferential than anything else, and weekly jobless claims aren’t really giving signs of weakness. I expect stock market volatility to pick up again next month, but the last week of March looks like it wants to be a quiet one.

The Economic Beat

The report of the week was really the durable goods report, which showed that the sector continues to struggle. The headline number of a 2.8% overall decrease (seasonally adjusted) was about on consensus and so didn’t really rattle markets. New orders were off 1% when excluding transportation and were (-1.9%) when excluding defense. The business cap-ex category was down 1.8%, though thanks to the extra leap-year day, the year-on-year unadjusted comparison was positive for the first time in thirteen months.

There was some good news in manufacturing, however, as the Richmond Fed manufacturing index surprised everyone with a sudden leap from (-4) last month to a blow-away reading of +22. These reports aren’t a great measure of output, as evidenced by the weakness in durable goods, but at this point it looks safe to say that February brought some measure of relief, perhaps aided by the warm weather.

The goods report was followed the next day by a GDP report that showed the second revised estimate of growth to be 1.4%. That’s up from the original 0.7% estimate and so received some valiant spin attempts from those trying to portray things as not so bad. At the same time, the Atlanta Fed cut its “GDP-now” tracking estimate to 1.4% for the first quarter, down from 2.7% last month. The markets were closed, so the reports came and went with little impact. Corporate profits were estimated to have fallen by 3.6% in the fourth quarter, after tax but before inventory and depreciation adjustments. That’s some thing to worry about.

Over in housing, the rate for sales of existing homes in February waned considerably from an 11% year-on-year rate in January (annualized, seasonally adjusted) to only 2.2%, thanks to a 7.1% monthly drop in the rate. I would guess that rising home prices are at work here, as buyers may have had enough – federal data showed a pickup to in annual price increases to 6% – but would also guess an upward revision is in store. New-home sales remained in the 490K-500K range they have occupied for the last seven months.

The main report for the upcoming week is the April Fool’s Day jobs report, and one wonders if the news will play into the date. I’m not expecting anything unusual, but one never knows with the jobs report. Consensus is for a gain of 210,000.

The week will start off with February personal income and spending, followed by pending home sales. Other reports of note include the Case-Shiller home price index on Tuesday, followed by consumer confidence later that morning. Wednesday gives us the ADP payrolls report, Thursday has the Chicago purchasing managers survey, and Friday’s jobs report will be followed by the ISM manufacturing index and construction spending. Given the improvement in regional manufacturing surveys, it looks like we are set up for a “surprise” beat in the ISM manufacturing number (consensus is for it to be barely positive), which could add to enthusiasm about the economy if the jobs number holds to form.