As of this writing January’s swoon in stocks has been more than offset by February’s swing. Where we go from here of course is anybody’s guess, for the markets are unequivocally unpredictable (particularly in the short-term). The U.S. economic indicators, while somewhat mixed of late, are, on balance, positive. Particularly for job growth going forward. The “somewhat mixed” aspect of the recent data I believe gives hope to those who fear that the first Fed rate hike lies just around the next bend. I happen to be one of those offbeat ones who fears that the first Fed rate hike doesn’t lie just around the next bend. Believe me, while I suspect the stock market may not at all appreciate the first Fed rate hike, holding rates at a level that suggests we’re in the middle of a great financial crisis, which clearly we aren’t, makes no sense whatsoever. And is ultimately a dangerous strategy should, say, oil prices normalize and wage pressures begin to mount (two inevitabilities I assure you) both at the same time.
Last week’s sizeable gains appeared to be largely in response to hopeful news out of Europe. Putin agreed to a ceasefire beginning Sunday (we should be very skeptical) and rumors suggest that talks on how to keep Greece from imploding, which resume on Monday, will bear fruit kick the can further down the road. Like I said last week, we should expect good news out of Russia to spark a rally in global stocks, and good news out of Greece to do the same, as well as rally the Euro. That’s precisely what played out the past few days. Although, mind you, both situations are extremely tentative.
Speaking of Europe, some of last week’s data, as did the previous week’s, suggest strengthening among the Eurozone’s biggest players. German exports grew by 3.4% last month, Eurozone Investor Confidence surged, and French and Italian industrial production actually rose. Still a long long way to go however.
Current themes:
Central Banks:
The U.S. Fed is clearly testing the water as several of its members are publicly making the case for hiking rates by mid-year. The rest of the world’s central banks are, in action, vowing to do whatever it takes to get their economies in gear. The problem is, central banks may not have all that it takes to do whatever it takes—the likes of Greece, a country in desperate need of further painful structural reform, is a prime example.
Oil:
West Texas crude has been bouncing all around fifty bucks a barrel for the past couple of weeks. The amazing build in inventories (see my notes below) suggest that a true bottom has yet to be reached. Not, of course, to say that it hasn’t (no one knows for sure). I assure you, no one a year ago was predicting $50 bucks a barrel in early 2015.
The Consumer:
Last week’s sentiment indicators suggest the consumer remains positive, but not as positive as he/she was, say, two weeks ago. The employment indicators remain strong. Sentiment, spending and employment related to construction speaks positively about the housing market going forward.
Europe: see above
Q4 Earnings (here I’ll simply update the numbers to last week’s paragraph):
Of the 391 of the S&P 500 companies having thus far reported, an impressive 76% have bested analysts’ expectations. On the revenue side, 56% did better than expected. The rate of growth however has been nothing to write home about, 5.1% and 1.1% respectively. Of course the energy sector, seeing declines of 19% and 17% in earnings and revenue respectively, is no small influence on the overall numbers.
The Stock Market:
Last week was the second positive week in a row for U.S. stocks. According to Morningstar, the Dow was up 1.09%, the S&P 500 rose 2.02% and the NASDAQ Composite gained a big 3.15% on the week. Using ETFs as our proxies, non-US markets also logged nice gains on the week: EFA (tracks the Morgan Stanley Europe, Australia and Far East Index) was up 1.53%, while FEZ (tracks the Euro Stoxx 50 Index) gained 1.96%. VWO (tracks the FTSE Emerging Markets Index) was up 1.56%. (The non-US ETF’s data are in U.S. dollar terms)
Here’s a look at each of the above on a year-to-date basis:
Dow Jones Industrials: +1.10%
S&P 500: +1.85%
NASDAQ Comp: +3.33%
EFA: +3.71%
FEZ: +3.42%
VWO: +4.03%
Sector ETFs:
Energy-related stocks extended their rally last week. XLE (tracks the S&P Energy Sector Index) gained 2.92%. However, it was bested by XLK (tracks the S&P Information Technology Index), with a 3.83% one-week gain, and XLB (tracks the S&P Materials Sector Index), up 3.12%. XLY (tracks the S&P Consumer Discretionary Index) had another big week, up 2.66%. XHB (tracks the S&P Homebuilders Index)—a narrower index—continued to shine with a 2.53% gain last week. The big loser (for the second straight week)—on the back of a rise in interest rates—was utilities, with XLU (tracks the S&P Utilities Sector ETF) posting a 2.98% decline.
Here’s a look at those sector ETFs, and a few others, on a year-to-date basis (according to Morningstar):
XHB (HOMEBUILDERS): +6.57%
XLB (MATERIALS): +5.90%
XLY (DISCRETIONARY): +3.72%
XLE (ENERGY): +3.69%
IYH (HEATHCARE): +3.47%
XLK (TECH): +3.26%
XLP (CONS STAPLES): +2.07%
XLI (INDUSTRIALS): +1.06%
XLF (FINANCIALS): -1.11%
IYT (TRANSP): -1.10%
XLU (UTILITIES): -4.30%
To put the inevitable (volatility and down markets) into perspective, here I repeat last week’s comment:
In last weekend’s commentary I attempted to put a rough January into proper perspective by urging you to view the stock market as an “antifragile” (benefits from stress) entity. Again, periodic market downturns are an essential aspect of the long-term investing process. As I stated in our year-end letter, and several commentaries since, I expect financial markets in 2015 to exhibit the kind of volatility that will challenge the resolve of many a short-term investor. Good thing you and I think long-term!
One additional note on volatility: The past couple of weeks I’ve shared with you the very short-term results for markets and sectors. I do this with a bit of hesitation, as I in no way want to give the impression that you, nor I for that matter, should base our long-term investment decisions on short-term movements in markets or their sectors. It can, however, serve as a reference point for how the markets are, or are not, responding to the data (which is why I, as a professional, track the short-term). As you may have noticed, my beginning of the year optimism over non-US and the housing sector (to name two), and pessimism over utilities, appears to be justified by recent results. I need to strongly (very strongly!) emphasize that I was not predicting what we’ve experienced these few short weeks into 2015. My optimism or concerns are based on factors such as valuations, trends, monetary policy and cyclicality—and my comfort in making allocation recommendations rests on the view that our clients are not short-minded investors (it can take awhile, if at all, for the market to reward what I believe to be good fundamental logic) who mistakenly believe that any human being possesses a capacity for market timing. Some people get lucky from time to time, but without exception, market timers are wrong far more often than they are right. The path to long-term investment success is fraught with bumps and potholes. The ones who successfully make the journey take it slow and never over-compensate when steering through and around the inevitable obstacles along the way.
The Bond Market:
The yield on the 10-year treasury bond rose .04% last week to 1.99%. To reiterate my concerns with regard to bonds, here’s from last week’s commentary:
As I suggested above, complacency can be a very dangerous thing. In my view U.S. bond investors have been the definition of complacent for a very long time. And who can blame them when the U.S. economy, until recently, has delivered probably the most sluggish expansion in its history and the rest of the developed world is sporting interest rates near zero, or below. I.e., there’s been little risk of inflation here at home, and the U.S. treasury has offered the most attractive yields among the world’s safest debt issuers. Not to mention how the strengthening dollar has enticed foreign investors into the U.S. bond market.
So what might alter the debt investor’s paradigm and inspire him to give up his treasury bonds? Well, it could be a number of things. Not the least of which would be signs that the U.S. economy is gaining momentum and that the Fed will have to begin raising interest rates sooner than later. Bond prices took it in the chin last week as the yield on the 10-year treasury jumped from 1.66% to 1.95% (that’s a 17% increase). Another excuse would be a sudden decline in the dollar (I know, that contradicts the present economic backdrop and the prospects for higher interest rates. But the consensus lives in that camp, and the consensus is very often wrong). Should, let’s say, the Eurozone begin to show real signs of life and, thus, the Euro begin to gain against the dollar, we could see money fly out of treasuries in a big way as those carry-traders (they borrow in low-yielding, declining currencies and invest in higher yielding, strengthening currencies) rush to exit their positions: A reversal in the currency exchange trend can be a killer (say you borrowed 1 Euro and lent it in the U.S. at a $1.12 exchange rate. If the dollar moves to $1.20/Euro, you no longer have enough dollars to pay back your Euro loan).
Suffice it to say that the bond market (as well as other interest-rate-sensitive sectors [think utilities]) is in a precarious position these days. Short-term rates at zero while the economy is gaining momentum is an utterly unsustainable scenario.
Here are last week’s U.S. economic highlights:
FEBRUARY 9, 2015
THE CONFERENCE BOARD EMPLOYMENT TRENDS INDEX shows “that strong job growth is likely to continue”. Here’s from the press release:
The Conference Board Employment Trends Index™ (ETI) increased in January. The index now stands at 127.86, up from 127.17 (a downward revision) in December. This represents a 7.6 percent gain in the ETI compared to a year ago.
“The Employment Trends Index suggests that strong job growth is likely to continue through the first half of the year,” said Gad Levanon, Managing Director of Macroeconomic and Labor Market Research at The Conference Board. “As a result, wage growth will accelerate, thereby increasing pressure on profitability which is already suffering from low productivity growth and the strong dollar.”
January’s increase in the ETI was driven by positive contributions from six of the eight components. In order from the largest positive contributor to the smallest, these were: Percentage of Respondents Who Say They Find “Jobs Hard to Get,” Real Manufacturing and Trade Sales, Industrial Production, Percentage of Firms With Positions Not Able to Fill Right Now, Job Openings, and Ratio of Involuntarily Part-time to All Part-time Workers.
THE FED LABOR MARKET INDEX dipped in January but the present trend remains intact. Here’s from Haver Analytics’ commentary:
The change in the LMCI dipped to 4.9 during January from 7.3 in December. The m/m fall reflected the lessened gain in nonfarm payrolls, the uptick in the unemployment rate and the stability of the insured unemployment rate offsetting improvement in other indicators such as the change in average hourly earnings and the rise in the labor force participation rate. Despite the latest decline, the index continued to suggest steady improvement in the labor market as it has trended sideways.
FEBRUARY 10, 2015
THE JOHNSON REDBOOK RETAIL REPORT shows a substantial slowing in retail sales last week, to 2.1% year over year, versus 3.8% the prior week. The report blames the Super Bowl for diverting consumer away from the stores and expect a pickup next week due to Valentine’s Day.
THE NFIB SMALL BUSINESS OPTIMISM INDEX retreated from two months of strong growth, slipping 2.5 points from December’s results to 97.9. All in all, January’s results were essentially okay (coming off of December’s hugely positive 100.4 [best post-recession results]), with the employment components remaining especially strong. Here’s from NFIB’s chief economist’s commentary:
Overall, job creation plans were solid across the board, but especially in Construction, Professional Services, and Manufacturing with the help of strong car sales including the bestselling luxury car defined as $50,000 or higher in price, Ford’s F150 truck.
The job growth in construction supports my optimistic view of the housing market going forward.
THE JOLTS (JOB OPENINGS AND LABOR TURNOVER) REPORT improved in December, showing 5.028 million job openings, up from 4.847 million in November. The total hires, 5.148 million (vs 5.054 in November) was the highest level since November 2007. Construction was the one sector in the report noted as seeing increased hiring over the month. The number of folks who quit their jobs rose to 2.72 million, vs November’s 2.66 million. This is a positive read on confidence as people generally don’t quit their jobs unless they believe prospects are better elsewhere.
WHOLESALE INVETORIES rose again in December, by .1% (rose .8% in November). As I suggested last month this is not a good reading in my view as higher inventories generally mean lower production going forward. The build shows up primarily in the non-durable component, where sales fell 1.7%. Petroleum is the biggest contributor, as sales declined 13.7% on the month—and crude oil inventory has been rising nonstop of late. Showing a big draw in inventories, however, were lumber and electrical goods, which is yet another indicator that suggests increasing demand from the construction sector.
FEBRUARY 11, 2015
THE MBA PURCHASE APPLICATIONS INDEX does not support my optimism on housing. Dropping 7.0% last week. On a year over year basis the index remains in the positive, but by only 1.0%. Even refinainces declined 10.0%. The average 30-year mortgage rate was a smidge higher at 3.84%.
THE EIA PETROLEUM STATUS REPORT showed crude inventories rising yet again last week by a whopping 4.9 million barrels. Total inventories remain at an 80-year high of 417.9 million barrels. This flies strongly in the face of those who believe the recent strength in the price is sustainable. While I suspect that (sustainably higher prices) is coming, I can’t join that camp amid the present supply/demand/inventory data. Gasoline inventories increased by 2 million barrels. Distillate inventories declined by 3.3 million barrels.
FEBRUARY 12, 2015
WEEKLY JOBLESS CLAIMS rose to 304,000 last week, while the 4-week moving average fell to 289,750. The week to week numbers have been volatile, but the 4-week average shows a favorable trend. Continuing claims fell 51,000 to 2.354 million, while the 4-week average declined by 19,000 to 2.404 million. The unemployment rate for insured workers remained at 1.8%.
RETAIL SALES (The govt’s numbers) were dragged lower primarily by gasoline prices. Auto sales declined by .5%… Ex out autos and gasoline and sales rose .2%. Although the consensus was looking for a .4% increase. The bright spots in the report were building materials and garden supplies (supporting my view on housing), electronics, miscellaneous store retailers, nonstore retailers and food services/drinking places. Here’s an interesting perspective from Econoday:
The latest retail sales numbers are not consistent with increased discretionary income and higher confidence. One explanation may be that consumers are spending more on services than on “hard” items found in the retail sales report. The big picture is that the consumer sector is improved but the next broad data will be in the next GDP and personal income reports.
BLOOMBERG’S CONSUMER COMFORT INDEX while remaining near its high since 2007 declined for the second straight week. Here’s Bloomberg’s press release:
American Consumer Sentiment Declines for Second Straight Week
By Nina Glinski
(Bloomberg) — Consumer confidence declined for a second straight week, interrupting a four-month surge as Americans’ perceptions of their finances and the economy waned.
The Bloomberg index of consumer comfort retreated to a five-week low of 44.3 in the period ended Feb. 8 after dropping to 45.5 the prior week, the first back-to-back decline since September. Even with the recent setback, the gauge of sentiment is hovering close to the highest level since July 2007.
A fluctuating stock market and rebounding gasoline prices since the end of January are probably keeping confidence from advancing further. At the same time, increased employment opportunities and signs of a pickup in wage growth point to sustained gains in consumer spending, which accounts for about 70 percent of the economy.
“It’s a pause from the party,” said Gary Langer, president of Langer Research Associates LLC in New York, which produces the data for Bloomberg. “That said, this week’s result is better than any of the index’s weekly readings from mid-October 2007 through the end of 2014.”
The Bloomberg measure for the state of the national economy fell to a five-week low of 38.1 from 39.9. The index for personal finances declined to 57.4 from 59.2. The gauge for whether it is a good time to make purchases also decreased, to 37.2, the lowest since November, from 37.5.
By region, a gauge of sentiment among Americans in the South fell 4 points, the most since October 2013, to a six-week low of 40.1. Confidence in the Midwest also declined. It increased in the Northeast and West.
Income Groups
Comfort among the lowest income earners fell last week, while those at the upper end of the scale were more upbeat. For those making $75,000 to $100,000 a year, the gauge of confidence climbed 5 points to the highest level since July 2007. Sentiment among Americans earning less than $15,000 was the weakest this year.
Last week’s drop in comfort extended to almost every age group. The biggest decline was among 35-to-44 year olds.
An improving job market may be giving part-time employees optimism that they can find full-time jobs. Sentiment among part-time workers increased for the first time in four weeks.
Job openings rose 181,000 in December to 5.03 million, the most since January 2001, the Labor Department reported Feb. 10 in Washington. Some 2.72 million people quit their jobs in December, the highest in four months and up from 2.66 million in November.
BUSINESS INVENTORIES rose .1% in December, which isn’t major, however, sales fell by a substantial .9%. The present inventory to sales ratio sits at 1.33 which is the highest read since July 2009. This does not bode favorably for production going forward. While there’s reason to believe this metric will improve going forward, it bears close watching.
NAT GAS INVENTORIES fell by 160 billion cubic feet last week, following a 115 bcf draw the week prior. This would be bullish for nat gas prices.
THE FED BALANCE SHEET rose 1.3 billion last week to 4.502 trillion.
M2 MONEY SUPPLY grew by 71.6 billion week before last.
FEBRUARY 13, 2015
IMPORT AND EXPORT PRICES continue their decline, which, some believe, will inspire the Fed to put off any near-term plans to raise interest rates. Here’s Econoday’s commentary:
Deflation is a rising risk for the economic outlook based on import and export price data where contraction is at its most severe since the 2008-2009 recession. Import prices fell 2.8 percent in January alone for year-on-year contraction of 8.0 percent. And it’s much more than just the impact of the strong dollar as export prices are also in contraction, at minus 2.0 percent for the month and minus 5.4 percent on the year.
The contraction is centered in petroleum where import prices fell a monthly 17.7 percent for year-on-year contraction of 40.1 percent. Excluding petroleum, import prices are still down sharply, at minus 0.7 percent for the month, which is the sharpest drop for this core reading since March 2009, and minus 1.2 percent for the year.
Turning to details on export prices, agricultural prices fell 1.2 percent for a year-on-year minus 6.3 percent. Excluding agriculture, export prices are down 2.1 percent, which is the largest drop since November 2008, and down 5.3 percent on the year.
The deflationary pull from inputs is now visibly pulling down prices of finished products. Showing an unusual sweep of steep monthly declines are import prices for capital goods (minus 0.4 percent), motor vehicles (minus 0.5 percent), and consumer goods (minus 0.3 percent). Year-on-year, all are also in contraction. The export side is less severe but does tell a similar story with consumer goods showing the most contraction, at minus 0.8 percent for the month and minus 1.4 percent for the year.
Fed policy makers are hoping that deflationary effects, tied mostly to oil prices, will prove limited, but there’s no evidence right now that prices are pulling higher, on the contrary, price contraction is accelerating. Today’s reports point to deflationary readings for the coming producer and consumer price reports.
THE UNIVERSITY OF MICHIGAN CONSUMER SENTIMENT INDEX remains strong, but it did decline this month to 93.6, from 98.1 in January (the best reading in 11 years). Which is consistent with the slight declines noted in other consumer sentiment indicators. Nothing here suggests the consumer is ready to pull in measurably at this point.