Weekly Update: Anticipation . . . is making me wait
Catholics knew we would have a new pope, but still we kept looking for the white smoke. We didn’t get an American, a disappointment we expected, but we got the first non-European pope, very well respected, who took the name Francis for the first time in history. Saint Francis, who was known to be a great uniter and rebuilder of the church, is a happy choice, and media commentators noticed how everyone in the huge crowd at the Vatican was smiling. Here we wait in an extremely quiet week—volume is very light—with the expectation of reaching a new high for the S&P 500, to join the numerous other indices which have already gone there. If history going back to 1954 is a guide, Ned Davis says we can expect the S&P to consolidate by maybe 3% to 6% after reaching a new high, before trading even higher. Of 13 previous such instances in the past 60 years, only once was the market down three months later, by 3%. Otherwise, the market was up an average 3% three months later. A year housing a new record has historically seen a full-year return of 12% to 17%, in line with the current thinking of Federated’s equity leadership. The current bull market officially entered its fifth year this week (March 9, 2009 is the start date) and the average gain in the fifth year has been 19%. Since 2009’s market trough, equity markets have doubled despite $120 billion of net outflows from global equity funds. Inflows so far have been just a quarter of post-’08 outflows, a happy thought to match with that happy comment above.
On the other hand, we have gone 78 days without a 5% correction and 360 days without a 10% correction. This is getting stretched. It is too popular to worry about a correction, so a consolidation is more likely. A 5% pullback takes us to 1,485-1,500, around the 50-day moving average. If there’s a bigger correction, 1,400 to 1,420 is excellent support. In any event, a new all-time high usually leads to profit taking, but history indicates such a milestone is bullish for the rest of the year. The market can focus on only one thing at a time, and right now, that doesn’t appear to be Washington. That could change, depending on what happens over the next few weeks. Beyond the discretionary spending cuts and increased taxes on the wealthy already made, an additional $2 trillion of savings are needed to stabilize the U.S. debt-to-GDP ratio at 70 percent. Fundamental tax and entitlement reform are the last remaining components of the needed savings, but also are the most difficult type of savings to achieve, particularly in a polarized political environment with a divided government. One look at the competing House and Senate proposals for the fiscal 2014 budget shows how wide the gap is between the two parties on fiscal policy. And for the first time since 1921, the budget process will begin without the president budget’s setting forth a framework ahead of Congress taking action.
Unclear after this week’s meetings with Congress was whether Obama was genuine about completing a budget deal or just trying to change his appearance in light of falling polling numbers after campaigning against Republicans in recent months. Some senators suggested that at the close of their recent dinner with Obama, they asked the president what the next steps were and he had no response. Hmm. Currently, President Obama claims he is for entitlement reform because he is interested in cutting Medicare reimbursements to health-care providers. These savings have very little to do with the growing unfunded liabilities in the system. Proposals like this do nothing to convince Republicans that they have enough cover to engage in raising more tax revenue. The president also often says he is for a less-generous inflation index on Social Security, but Senate Majority Leader Reid has blocked that from consideration repeatedly. Here I sit in Washington, D.C., not far from our party leaders who are each presenting their plans, neither of which have a prayer (Get it? Sorry!) of passing. But, the word is, they are talking at least. I am writing in my hotel where it is so quiet you can hear a pin drop. This is the week for quiet waiting, I guess. But as an Italian, I find it maddening. Anticipation … it’s keeping me waiting.
Inventories will help first-quarter GDP Business inventories jumped 1% in January, the most since March 2011 and double the consensus. Not previously reported retail inventories rose a stronger 1.5%, the largest gain since 2006. And already-released manufacturing and wholesale inventories rose 0.5% and 1.2%, respectively. Combined with February’s retail sales (more below) and this morning’s stronger-than-expected increase in February industrial production, the buildup could push first-quarter GDP growth estimates toward 3%, well above the consensus 2% and Federated’s own 1.7% estimate.
So will retail sales but … February sales jumped the most in five months, raising the year-over-year change to 4.6%. But higher gasoline prices were the major factor—gas station sales soared 5%. Core retail sales (ex-auto, gas and building materials) rose only 0.4%, and the increases were driven by spending on necessities, such as gasoline and food, and on subprime loans for subsidized GM cars. Restaurants and furniture/home furnishings posted their biggest decline in nearly two years, and electronics and appliances had their lowest market share on record.
Small business optimism rises The NFIB gauge rose in February by the most in 10 months, with capital expenditure plans for the next three to six months reaching their highest level since June 2008. Despite the third straight monthly improvement following a post-election drop-off, the index remained low relative to pre-recession levels, with taxes and government regulations, as usual, topping the list of small firms’ most important problems.
Consumer mood sours The initial Michigan gauge for March unexpectedly fell to 71.8, its lowest reading since 2011 and well below forecasts for a slight increase. While the current conditions component declined modestly, the economic outlook plunged and was almost wholly centered on higher-income consumers, where sentiment for families making more than $75,000/year dropped more than 10 points while sentiment for those making less was little changed. Sixty percent of consumers do not expect their incomes to grow this year and 57% expect real income to decline. These concerns were tied to fiscal policy as 34% of respondents reported hearing unfavorable news about the government, an all-time high in the survey’s 35-year history. This report reinforces our view that fiscal policy remains a significant downside risk.
Inflation watch Import and export prices, as well as headline CPI and PPI rose above expectations in February on spiking energy costs. CPI’s 0.7% month-over-month increase was its fastest since June 2009. Core prices remained relatively moderate, although at 2%, core CPI now stands at the Fed’s target rate. That’s still below the 2.5% trigger the Fed has set for beginning to ease off the throttle, a tack policymakers aren’t expected to take when they meet next week. The central bank’s full-bore monetary support is helping keep U.S. long rates well-behaved in the face of brightening economic data.
Labor market has issues If sequestration stays, it’s estimated it will represent a monthly drag of 50,000 to 75,000 on full-time equivalent payrolls. Unemployment statistics also show that while 446,000 part-time jobs were created last month, full-time jobs decreased by 276,000, and fewer Americans are working full time compared with a year ago. Finally, 21% of respondents in the NFIB survey reported having positions they were not able to fill, the highest level since 2008, and 34% reported few or no qualified applicants for openings. This is reflective of a skills mismatch in labor markets that has been one of the factors leading to higher structural employment in recent years.
What do they know that we don’t? Insider selling remains high. Currently, there are around seven sellers for each buyer; the long-term average is just 3.5. Moreover, in absolute terms, insider buying (seasonally adjusted) has also declined toward its lows. This suggests that when firms report in April, they are likely to disappoint on revenue—after all, who better than insiders to know their own near-term revenue outlook?
Laughter may not be the best medicine but at least it’s free I spoke last evening at yet another new venue for me, a fabulous home of an adviser that was built in the 1800s deep in the woods of one of the wealthy D.C. suburbs. She served dinner, and among the clients in attendance were two highly accomplished surgeons and we got to talking about Obamacare. I mentioned that I haven’t seen my primary care physician for my last five physicals because whenever I called for an appointment, I’m told he’s not available for two months in. But recently, my doctor just sent me a letter inviting me to his new practice where for just $1,650 a year, he’ll guarantee that I can see him whenever I want to. The client surgeons were familiar with this trend and agreed that this was the only way patients will see their doctor in the future. Most patients, one of them said in a most colorful way, will be out of luck. And then these two surgeons just laughed and laughed.
Just say no to green beer As millions prepare to celebrate St. Patrick’s Day, the makers of Guinness are asking revelers to forego what is becoming a tradition—green beer. Guinness says a proper Irishman (or woman) never drinks green beer and prefers his pint to be dark, as in a nice stout. I’m a wine girl myself.