Weekly Update: Sell in March and go away?
If sequestration occurs as scheduled two weeks from now, the market is not pricing in anything worse than a temporary closure of some nonessential government agencies. But aren’t the sides very far apart? Obama is calling for a short-term budget deal to avert the across-the-board cuts, saying there is no need to endanger “the jobs of thousands of Americans.” But ISI says there is no chance the GOP will support Obama’s sequester substitute. Washington Analysis puts the odds that sequestration will go into effect on March 1 above 60%, with mandated spending cuts of $42.7 billion to defense, $26.4 billion to non-defense discretionary items, and $16.2 billion to Medicare. Credible estimates put job losses from a seven-month sequester at up to 1 million, with a GDP drag up to 0.7%. A sequester of this magnitude has never occurred, so the execution and impact of it is unknown. Could this be the next big thing the market focuses on? (Remember, it only focuses on one thing at a time.) It could be the catalyst for a correction many, including advisors I met with this week in the Raleigh area, have been saying is coming for some time (thus arguing against one).
ISI says the current market is a textbook example of being “extended.” The small-cap Russell 2000 Index is farther above its 200-day moving average than it was before the notable corrections in early February and mid-September last year. It also has advanced to the top of its upward price channel, a resistance area, and is above the top of its relative-strength-index range, a sign of being extremely extended. Renaissance Macro notes sequester politics are not being followed to the extent the fiscal cliff and debt ceiling had been, so risk appetite may come under pressure when investors turn their attention to this potential fiscal drag, which Google trends also suggest have not been discounted into the current market. Then again, might the can get kicked again? House Speaker John Boehner, instrumental in kicking the debt-ceiling can to May, this week expressed concerns about the defense cuts. Will the Republicans give in again? Will the Democrats give in at all? Might the two sides wait for other action-forcing events, such as the March 27 continuing budget resolution expiration, the April 15 fiscal-year 2014 budget deadline or the May 19 debt-ceiling deadline? Could several mini-cans get kicked even further down the road, to perhaps August, which would be the new real debt-ceiling deadline if more accounting gimmicks are used?
Right now, the one-thing-at-a-time market seems to be focused on the earnings season’s solid tone, encouraging guidance and healthy margins—all supportive of 2013 bottom-up earnings per-share estimates of $112 on the S&P 500. It all sounds good. But there are nagging concerns arising again out of Europe, where French, Spanish and Italian bond spreads have been widening. The two most worrisome things to Renaissance Macro are Europe in the very near term and the March-April-May scenario discussed above. The last three years, you would have been wise to “Sell in May and go away,’’ as the old adage goes. But I keep hearing that we are waiting for the pullback (which we think will be shallow when it does arrive). You have to ask yourself, when do you think they will sort all this fiscal mess out? Do you expect they are going to do something of import? And if they do, what are the odds they will do it in the next three weeks? And what are the odds the market is going to like it? (Probably not good.) Asian astrologers warn of a stormy Year of Snake. Hong Kong’s celebrity feng shui master Mak Ling-ling predicts the stock markets will enjoy a smooth first half before becoming turbulent in the second half, which she links to the characteristics of the reptile. I’m not taking this seriously; I’m just reporting. But with all this in mind—Europe, budget battles, Year of the Snake—what should we do? Sell in March and go away?
Positives
Trade boosts fourth-quarter GDP December’s trade gap unexpectedly plunged as nominal exports of industrial supplies surged, real imports of petroleum fell 10.5%, petroleum exports rose 8.5% and imports were weak across the broad. While a work stoppage at a major West Coast port (Long Beach) likely impeded the flow of imports, the sharp narrowing nonetheless could lift 2012 fourth-quarter growth by seven tenths of a point, pushing it back into expansion territory from its flash estimate of a 0.1% decline.
All roads lead to jobs The ISM’s nonmanufacturing index slipped but was still a slightly better-than-expected 55.2 in January, indicating services are expanding at a healthy pace. Notably, the employment component—historically a decent leading indicator of private service-sector hiring—rose to a seven-year high. The last time it was this level, private-sector payrolls rose 217,000 in the month. And a bright side to a worse-than-expected drop in fourth-quarter productivity (more below) was solid growth in employee hours, another sign of labor market strengthening.
Auto sales remain in higher gear Although down slightly from December, January light vehicle sales held above the 15 million annual run rate for the third straight month and were near five-year highs. Sales are tracking better than average at this stage of the business cycle, up 9.3% on a year-over-year basis. Industry executives expect sales to rise 7% to 8% this year.
Negatives
Factory orders disappoint They rose less than expected in December as nondurable goods orders fell a second straight month and nondefense capital goods ex-aircraft orders were downwardly revised. Capital expenditure demand likely was pulled forward in October and November by the approaching end of the 50% capex bonus depreciation, which eventually was extended for another year. On a year-over-year basis, factory orders have risen 1.6%, well below the historical average, while capex orders declined 3.3%, down a sixth straight month.
Productivity plunges It fell an annualized 2% in the fourth quarter on very soft output growth and a spike in unit labor costs. Most of the weakness was in the service part of the economy as manufacturing productivity rose 0.5%. Deutsche Bank says the jump in compensation growth could have been partly due to the pulling forward of income into the quarter ahead of scheduled tax increases. However, the upward trend in labor costs is arguably stronger than what would appear on the surface to be significant labor-market slack.
Diminishing dreams Americans’ characteristic economic optimism is fading, with nearly nine in 10 saying the availability of good jobs with good pay will never return or will not return for many years, according to a new poll by the John J. Heldrich Center for Workforce Development at Rutgers University. The poll coincides with January data showing the return of higher-wage jobs has been slow, with 69% of the 2.7 million private payroll jobs that have yet to be recovered from the Great Recession falling in fields with above-average pay. An AP/Washington Post analysis also found pay for nearly all permanently disappearing jobs—those that aren’t likely to come back because machines and software can do the work better—ranged from $38,000 to $68,000 a year.
What else
Must have coffee This week, I enjoyed visiting with our sales force at our national sales conference in Pittsburgh. The keynote speaker was a doctor who discussed stress and balance—did you know only 3% of the adult population can be at their best with less than 8 hours of sleep each night? The doctor recommended no caffeine after noon (OK). He also suggested no caffeine for a three-week period! (Ain’t going to happen.)
The wave of the future, I’ll bet Billionaire hedge fund manager David Einhorn is suing cash-rich Apple in a goal to “get more dividends.” Why not just invest with managements who believe in a dividend culture?
Won’t you be my valentine? There is a new free smart-phone app called Crazy Blind Date. If a would-be dater is free at 7 p.m. on a Wednesday, he or she can select a local bar or coffee shop from the app’s recommendations, then choose among four people who are free at the time and who the algorithm says may be good matches. The strangers are expected to spend only 20 minutes on the date and to rate their companions in terms of “kudos” afterward. The app was downloaded more than 130,000 times within two days of its release! Some might think that I met my husband on a blind date because he’s not the most handsome man in the room. But they would be shallow people. I hope you’ve had great luck finding your valentine for Thursday because me, I hit the jackpot!
