“All is for the best in the best of all possible worlds.” – Voltaire, Candide
Okay, so stocks managed another up week that finished the retrace of the slide that began in late August. As President-elect Donald Trump himself now seems to be saying, what do we do now?
Mr. Trump’s posture is holding the key to the current rally, and he may well continue to do so. The rally began when his conciliatory speech appeared to not confirm Wall Street’s worse fears, and a rip-reversal rally quickly got under way. Now the market has several tempting lures – a break-out to new highs, the end of the year rally, no more earnings to think about (it’s best these days not to think too much about reality and valuations). Technicals and hope might not seem to be the soundest of foundations (because they’re not), but it’s the stuff that dreams are made of and can go farther and further than you think.
A certain amount of nebulousness by the President-elect would only help. As noted the previous week, there are a wide number of divergent and often contradictory ideas about what Mr. Trump may or may not do, and what he did and didn’t really mean. So long as this picture remains fuzzy, all are free to pursue their own private visions of just what the best of all possible worlds might be.
Despite the warnings of many about the difficulties inherent in getting any stimulus program out, the impact it might really have on the economy (“very little,” says bond king Bill Gross) and the lag involved therein, the lack of detail and a desire not to miss the move are all combining to cast the rosiest of glows about the future outlook. So long as reality does not intrude – and I make no predictions that it is obliged to do so before year-end – the way is clear for the market to tack on a few more percent between now and the end of the year.
The market is usually wrong about such matters, embarking on prolonged sell-offs in the weeks following the election of Democrats and rallies for Republicans. While it’s useless to jump in front of these waves early, they have historically turned into excellent contrary opportunities. Every stock market in history has turned south after the tenure of a two-term president has ended, and while that doesn’t rise to the level of a natural law, it’s something to think about.
For now we may be in for the reverse of the Treasury rally of the fourth quarter of 2008. As it became clear that business was falling off a cliff that quarter, money managers fled en masse to the safe haven of long-term Treasuries, bidding it up to crazy levels by year-end, then abandoning them almost as quickly in the new year. We might see some crazy stock buying by year-end (the stock market is clearly anticipating the same) as money managers rush to appear to fully positioned in equities, regardless of what they think might happen next year. Why not? After all, so long as everyone can fill in their own blanks on what will happen, all will happen for the best. I wish all of my readers a Happy Thanksgiving.
The Economic Beat
October retail sales came in ahead of expectations with an initial estimate of a 0.8% monthly gain, seasonally adjusted, versus consensus expectations for a gain of 0.6%. Ex-auto sales were also estimated to have gained 0.8%. September got a big boost upward as well, going from +0.6% in its initial estimate to +1.0% in its first revision, quite a boost. Excluding autos and gas, the gain was estimated at 0.5%.
It was another case of another piece of monthly noise being hailed as some kind of significant change in trend. The year-year unadjusted change for October sales currently stands at 2.1%, which is better than the year-ago 1.7% but still well below the month’s average y/y gain of 4.1% since 1993 (the data series began in 1992). A look at the ex-auto, ex-gas series is more revealing, as the trailing-twelve-month (TTM) gain eased from 4.2% to 4.1% (unadjusted). The average for both the last twelve months and the last 3 years in this series is 4.2%, so it doesn’t look as if anything has changed at all in spending patterns apart from gasoline being cheaper, which changes the spending mix but not the total. TTM ex-auto sales did improve back to 2.6% from 2.5%, the latter number also being the average year-year gain in weekly earnings, according to the latest jobs report. Auto sales continue to expand at a faster pace (+3.3% YTD), largely fueled by easy and cheap credit.
Over in manufacturing, there was a little up noise and a little down noise, with the end result being sideways-to-down over the last year, as it’s been much of the time. We just keep lowering the bar. The New York Fed manufacturing survey increased to a slightly positive 1.5 (zero is neutral) from (-5.8) the prior month, while the Philadelphia Fed survey eased to 7.6 from 9.0. The Kansas City region fell to +1 from +6. Industrial production, however, was unchanged in October according to the Federal Reserve, and is down 0.9% over the last twelve months. Higher oil prices helped activity in the mining sector, while a mild October meant a drop in utility usage. Manufacturing posted its second straight monthly gain of 0.2%, leading to the usual hopeful talk, though it remains down 0.2% over the last year.
Housing activity looks like it’s maintaining the pace it’s been on all year. The homebuilder sentiment index was unchanged at a strong 63 (50 is neutral), while housing starts had a very strong month after a very weak one. There were indeed some odd-looking dips and bounces the last two months, but the most important result is that single-family starts are up 10% year-to-date through October, after being up 10.3% in 2015. In sum, no change in the pace of building single-family homes. Overall, starts are only up 5.9% versus last year’s 10.8% pace, indicating a sharp drop in the pace of multi-family growth.
Price movement was still subdued in October, though less so than mid-summer. Producer prices were unchanged in the month, taking the year-on-year rate to 0.8% from 0.7%, up 1.2% when excluding food and energy. The consumer price index registered a 0.4% gain to lift the year-on-year rate to 1.6%, or 2.1% excluding food and energy. Import prices rose a sharp 0.5%, thanks to a spike in oil, but remain down 0.2% on the year, while export prices were up 0.2% to ease the year-on-year decline to (-1.1%).
Next week is holiday-abbreviated, with news on housing in the form of existing home sales on Tuesday and new-home sales on Wednesday. October durable goods orders also come out on Wednesday, when market activity drops off sharply after lunchtime in New York City in anticipation of the Thanksgiving holiday. The Fed minutes come out that afternoon, though most already consider a December rate bump a done deal. International goods trade is on Friday, which will see an early close of 1PM. Happy Thanksgiving!