Holiday from Reality

“Reality doesn’t impress me.” – Anais Nin (diaries)

We trust our readers had a good holiday weekend, although the Northeast did face some rather disappointing Memorial Day weather. At least there wasn’t much in the way of storms, as those seemed to mostly emanate from Washington and a certain overseas trip.

The markets were in happy-trading mode last week, as traders used the prior week’s dip-rebound as a springboard to march inexorably forward to completing the inverse necklace pattern and making new highs, one of the most compelling bull-market trades ever invented. The only real significance of the trade is that traders are not afraid of imminent recession. It doesn’t mean that stocks are cheap (nobody says that these days) or that valuations are “fair” (the refrain from equity-based asset management companies). It just means that traders aren’t afraid.

Some may wonder why the market seems so unfazed by political headlines, so it might be helpful to review a couple of basic truths about the stock market. One is that in the short term, the stock market is focused on the short term. In the long term, the market is mostly focused on the short term. Thus, when it comes to political headlines or geopolitical events in general, the attention span of equity investors and traders is marvelously short. What doesn’t kill us today probably won’t affect tomorrow, so why take the chance of missing out? Sure, markets can and do react to bad news, but unless political storylines can get demonstrably worse (and louder) every day, the stock market has always tired of them quite quickly.

Long-term investors may indeed fret about some of these matters, but there is so much professional risk in falling behind for even a couple of weeks (making it difficult to catch up in the annual tables race) that most managers will just stay invested and hope to weather the eventual storm. Hedge-fund managers are far more likely to take risk seriously, meaning they often pay quite a price by underperforming for long stretches during periods of market overvaluation. However, hedge fund management is a business where you hope the good times pay for the bad. The people managing your 401K investments are locked in, come hell or high water.

Expect to hear more stories this summer about market valuation, administration peccadilloes, and – unfortunately – terrorist attempts to avenge the dwindling ISIS sway in the Middle East. As for me, I’m already looking forward to the next holiday.

The Economic Beat (holiday version)

Friday was the highlight of the week, and not simply because everyone was clearing out for the Hamptons at lunchtime (though the subpar weather may have held that rush down this year). The day led off with the April durable goods report and first revision to the first quarter GDP estimate, two of the more important bulletins in the canon.

One disappointed, one did not. Durable goods orders were down 0.7% seasonally adjusted (SA), and core capital goods were flat. The decline in trailing-twelve-month orders vs. a year ago eased from (-3.1%) to (-2.4%). Disappointing.

Q1 GDP came in a little better than expected, at +1.2% (seasonally adjusted annualized return) vs. the initial estimate of 0.7% and expectations for a bump up to 0.8%. Definitely not disappointing, though a relatively minute amount of money – when annualized – made the difference.

In regional Fed industrial surveys, Richmond’s run of optimism came to a sudden halt with a drop from 20 to 1 (consensus 15, zero is neutral). Kansas City was consistent with a read of 8 vs. 7 the previous month.

The pace of home sales eased. The initial estimate in sales of new homes showed an air pocket, with the pace of sales dropping from 642K (SA) to 569K. It was the first month of negative year-on-year comps in a few years. Existing home sales slipped from a 5.7mm pace (SAAR) to an estimated 5.57mm homes. Through March, the federal mortgage agency report is showing a 6.2% annual rate of increase in the price of existing homes. While that is down from the previous month’s 6.4%, realtors are starting to talk about price fatigue.

The April bump in industrial production (led by oil activity) meant a big rise in the Chicago Fed’s national activity index, from 0.07 to 0.49, a pretty good reading for this index.

The coming week’s holiday-shortened focus will be on Friday’s jobs report for May (consensus the usual 185K), with the ADP payroll report coming a day late on Thursday. Other major reports include personal income and spending on Tuesday, pending home sales on Wednesday and construction spending on Thursday. Surveys due out include the Dallas regional report Tuesday followed by Chicago on Wednesday, along with national reports from the Fed on Wednesday (the “Beige Book”) and the ISM on Thursday (manufacturer purchasing manager index).