Weekly Update: Ugh
This is my husband’s favorite response whenever I say something he doesn’t like (which is reasonably often). The word fits today. In my travels the last several months, I’ve been describing our bullish outlook that calls for the S&P 500 to reach 1,450 to 1,500 during the middle six months of this year. The only reason to be bearish here is if you think a recession is coming to the U.S. this year, or that Europe is going to fall off the tracks. The news we got today on jobs (more below) and on Europe all week wasn’t great. You can’t dismiss this week’s new record low in yields—negative real yields in perceived safe-havens around the world with the 10-year Treasury dipping to the lowest since the 1700s and the 10-year German bund falling to 1.16% (ugh). But a 10% correction in the first half of an election year is very normal, as is a correction off this year’s very strong 12% jump out of the gate. A 10% correction off the S&P’s recent high of 1,423 is about 1,280, which is right around the 200-day moving average. It’s all well and good if we stay above that level.
I thought a better-than-expected jobs trajectory would propel the market this summer, but today’s news didn’t help my argument. May’s household survey, historically a leading indicator of job growth, rose significantly, as did the participation rate. It always is the case that the unemployment rate rises during a recovery once the unemployed throw their hats back in the ring. While the jobless rate rose to 8.2%, this reflected a rebound in labor force participation rather than a drop in employment. Not terrible. Meanwhile, Bank of America’s sell-side indicator is more bearish than it was even in 2008, and May’s 9% decline in global equity markets (ugh) was one of the worst of the past decade. The first five months of this year were on track to see record outflows from equity funds, with the first three weeks of May experiencing an equity fund outflow at a monthly rate of $18 billion, almost triple the prior five-month average outflow. Everybody is on the other side of the boat. Ned Davis Research’s proprietary sentiment index has reached levels consistent with a correction bottom but not extremes associated with bear markets. Watch the VIX—a rise to above 30 could signal a bottom; it’s currently at 25.
June is going to be a very interesting month. A lot can happen in June. On June 6, EU officials are expected to unveil a framework for the resolution of failed banks. On June 7, Fed Chairman Bernanke will testify before Congress and may use this appearance to discuss the slowing U.S. economy and temper some of the recent hawkish rhetoric from other Fed officials. On June 17, there’s the big election in Greece between pro- and anti-austerity parties. Fed, EU and ECB policymakers also meet later this month. And the U.S. Supreme Court is expected to rule on Obamacare, most likely the last week of the month. I traveled to St. Louis this week. As I was bantering with the cabbie about sports, I asked him if they had a baseball team, and he said, “Only the world champion Cardinals!’’ Oops. I told him he was lucky because we in Pittsburgh have a really bad team. He agreed and said he would be glad to take McCutchen off our hands. I said, he’s a pitcher, right? And he suggested I shouldn’t discuss sports. If my husband were there, he would say, “Ugh’’ (BTW, this weekend marks our 27th anniversary. Happy anniversary, dear. I’m in town to celebrate this one!) And I can’t think of a better word for how I’m feeling about these statistics than, ‘Ugh.’
Positives
Manufacturers and builders hanging in Despite mixed signals from regional surveys, May’s ISM Manufacturing Index was surprisingly good. While the headline dipped slightly more than consensus—it fell to 53.5 from 54.8 vs. a forecast of dip to 54—the index remained entrenched in expansion territory, with the critical new orders component jumping nearly two points to 60.1 for the strongest rate of monthly growth since April 2011. Markit’s separate PMI for the U.S. also came in at a solid 54 for May. Elsewhere, the Commerce Department reported that April construction rose an in-line 0.3%, but upward revisions to March put overall spending up 6.8% year-over-year, with a jump in multifamily outlays leading April’s rise.
Consumers hanging in While a final tally for May wasn’t available at this writing, anecdotal reports from major U.S. automakers reflected a robust sales pace for the month. Chrysler said its U.S. auto sales rose 30% in May, while Ford posted a 13% increase and GM said sales rose 11%. Also in May, major retail chains in the U.S. reported sales growth that exceeded expectations. Experts said shoppers were attracted to stores in a greater number by successful Memorial Day and Mother’s Day promotions, as well as lower gasoline prices. Separately, the Commerce Department said April personal income and spending rose in line with consensus.
Housing’s bumpy bottoming process April pending home sales fell 5.5%, much worse than expectations for no change, and the Case Shiller price index showed a 1.9% year-over-year decline in Q1, putting it at a new low. However, Barclays said the sales drop-off likely reflects some payback following three months of solid gains and notes the trend remains positive, with pending home sales up 14.7% year over year, vs. March’s 10.5% increase. And the seasonally-adjusted 10-city and 20-city Case Shiller indexes—which are based on 3-month moving averages, which might be the reason they appear to be lagging the upturn in the other indices—rose a second straight month. Elsewhere, 12-month non-distressed sales have turned positive for the first time since 2006, and ISI Global’s proprietary housing survey hit a six-year high, suggesting momentum is continuing to build and is starting to signal a solid recovery for housing—a positive for GDP, consumer net worth, housing starts and employment.
Negatives
Jobs a big disappointment May’s payroll employment gains of 69,000, the smallest increase in a year, were even below whisper fears. The report suggests that the labor market recovery has lost significant steam in recent months, as April's figure was also revised downward and hours worked dipped. The household survey, as noted above, had more of a mixed tone. The silver lining: The likelihood of further monetary policy easing has risen appreciably.
Confidence dips The Conference Board’s Consumer Confidence Index fell for a third straight month, contrary to expectations for a gain, and contrary to the pickup in last week's University of Michigan Consumer Sentiment Index. The confidence index’s present situation component fell for the first time in four months, but income expectations edged up modestly. Its findings are indicative of a still expanding but sluggish economy, and differ from Michigan’s for a few reasons. Michigan’s sentiment gauge is highly sensitive to conditions in the financial markets, while the consumer confidence index is highly sensitive to changes in the labor market, which has slowed this spring. A big negative in the Conference Board’s survey was an uptick in “jobs hard to get.”
GDP slows The second estimate of Q1 GDP, from 2.2% to 1.9%, painted a picture of modest but clearly unspectacular growth across national output, household income and corporate profits. That consumer and business spending are now the main growth drivers, supported by modest gains in income and profits, is an encouraging sign, but policymakers will remain wary that the economy is vulnerable to negative shocks. And this is before the year-end fiscal cliff!
What else
We have a lot of shale gas in Pennsylvania Reuters reports that “vast reserves of natural gas and oil unlocked from underground shale deposits have slashed the price of U.S. natural gas to a fraction of costs in Europe and Asia, making it some of the cheapest energy in the world. The shale energy revolution could turn the U.S. into a net exporter of many fuels in a little more than a decade, transforming energy from the economy’s Achilles’ heel to a source of strength.” Natural gas prices already have plunged 47% from a year ago and 82% from July 2008’s record high. Trucking, which moves 3/4 of American freight, is rushing to convert to natural gas. Among companies, Waste Management says 80% of the trucks it purchases during the next five years will be fueled by natural gas. Snack-food maker Frito-Lay says running natural gas-powered trucks costs about 40% less per mile than diesel.
You can come home again A new study by the Hackett Group found that U.S. companies are exploring reshoring as an option for nearly 20% of their offshore manufacturing capacity between 2012 and 2014. Its research found that the cost gap between the U.S. and China has shrunk by nearly 50% over the past eight years, and is expected to stand at just 16% by 2013. The trend is largely driven by rising labor costs in China and falling energy costs in the U.S.
It’s a little early to be worried about “crowding out’’ After four years of $1 trillion budget deficits, investors’ demand for 10-year U.S. Treasury securities still far exceeds the amount the government is ready to sell. Such debt yields 24 basis points more than the average for debt issued by AAA-rated nations, including Germany and Australia.
