Weekly Update: Are you in or are you out?
In my travels this convention week, some of my more liberal friends say Romney won’t be specific enough about what his administration will do to rein in costs. Well, 84% of seniors say in surveys that they absolutely are going to vote; 84% means neither side is going to remotely say anything to upset them. Both sides know what matters most is getting elected; then you can sort it all out. At this writing, we’re halfway home in this convention season; the Dems and Obama come up next week. And while it’s hardly made for scintillating television—what little TV there’s been—it’s a far cry better than what we’ve been getting in the market. The stock market has been boring since Aug. 2, with the exception of Aug. 21, when the S&P 500 made a new 4 1/2-year high, only to close negative on the day. Otherwise, trading ranges have been narrow and the volume extremely light. This generally would be bullish, although the longer the markets do nothing, the more likely the break will be to the downside. However, until we break support at 1,387 on the S&P, or see a big pickup in volume without upside progress, we give the benefit of the doubt to an extension of the rally. As we’ve been saying, the pain trade remains to the upside.
Surely, bears must be getting frustrated—the S&P spent nearly the entire month of August in the top quarter of its range since the June lows. When you look at the major indices, and many individual securities beneath the surface, you can see more constructive action than not. Last week was the fourth in a row in which the S&P index did not breach the low of the previous week, and the 200-period weekly moving average is now firmly sloping upward after being in decline since the fall of 2008. The last time this moving average made a bearish-to-bullish reversal was June 2005. While this does not mean the market must now surge to new highs, a major long-term trend is in favor of the bulls. Moreover, while the recent lack of trading volume stands in contrast to last year, it’s normal for August. Since 1929, average daily volume on the NYSE has been down by a median of 7% in the dog-days’ month, a greater drop than in any other. Then in September, it has risen by 11%, a greater increase than in any other month. There’s a good chance that volume will pick up when traders return to their desks from vacation season, particularly given that next month’s docket is pretty full.
You have this weekend’s Jackson Hole gathering, followed by the Sept. 6 European Central Bank meeting, where the ECB may communicate its intention regarding peripheral bond purchases (though some ECB officials recently have expressed doubts that, given the complexity and controversy of the issue, a complete intervention plan will be ready by then). The Sept. 12-13 policy-setting meeting of the Federal Open Market Committee (FOMC) follows. Given the recent risk-on rally in the market, it would be easy for the Fed to “disappoint” at Jackson Hole, though Bernanke seemed to suggest this morning that more quantitative easing is in the offing (more below). But even if the FOMC doesn’t come through next month, the Fed remains predisposed to more stimulus. And this is coming against a backdrop where China is moving toward additional easing, the ECB has been more accommodative, the Bank of England has pursued additional QE, the Bank of Japan has eased, the Swiss have acted to weaken their currency, and Brazil eased this week, pushing rates to their lowest level ever. “Don’t fight the Fed (and global central banks overall)” remains an appropriate medium-term mantra for investors, even if more volatile days are likely. Why not bear this in mind as you buckle up for September and decide whether you are in or out.
Positives
More evidence of housing’s continued recovery The pending home sales index rose a more-than-expected 12.4% year-over-year to its highest since April 2010’s end to the homebuyer tax credit, and to a 5 1/2-year high if tax-induced distortions are excluded. Also, S&P/Case-Shiller says seasonally-adjusted existing house prices in the second quarter rose year-over-year for the first time in two years and by the most since 2005’s fourth quarter. Prices are now back to early-2003 levels. This represents positive support for both consumer confidence and consumer net worth, which in turn is good for consumer spending.
Consumers spending again Speaking of consumer spending, nominal consumer spending was a bit lower than expected in July, but real spending showed a solid 0.4% gain—the first real gain in spending in three months. This, and this week’s generally better-than-expected chain-store sales reports for August, point to solid consumer spending for the third quarter. Personal income also rose in July, while the Fed’s separate report showed household debt declining in the second quarter, suggesting consumers should continue to increase spending modestly as long as a sluggish job market doesn’t worsen.
Grave + daunting=QE3 In Bernanke's conclusion to his speech this morning, the Fed chairman highlighted the still-weak state of the U.S. labor market as a “grave concern” and emphasized that “we must not lose sight of the daunting economic challenges that confront our nation.” The most important sentence of the whole speech, in the view of ISI Global: “The costs of non-traditional policies, when considered carefully, appear manageable, implying that we should not rule out further such policies if economic conditions warrant.” Whether QE3 happens in September will depend on next Friday’s employment report.
Negatives
Consumers may be spending but they aren’t happy The Conference Board’s consumer confidence index fell in August by the most in 10 months to the lowest level since last November. Notably, the drop-off was led by a sharp plunge in the expectations component, and the jobs availability outlook was at its worst level in nine months. More survey respondents expect their incomes to decline over the next six months than to increase. This level of pessimism wouldn’t seem to bode well for President Obama’s reelection, a view reinforced by the University of Michigan’s final read on August consumer sentiment. It rose slightly above forecasts, but the future expectations deteriorated and the overall index remained 20 points below levels at which incumbents since 1989 have won reelection.
Blah economy As expected, second-quarter GDP was upwardly revised to 1.7%, about half its historical average of 3.2%. Inflation pressures remain minimal, as the core PCE Price Index advanced at a 1.8% rate, below the Fed’s target of 2.0%. Taken together, this report and the Fed’s Beige Book (which suggested the economy grew slowly but steadily in late July and August), raises expectations the Fed will provide more monetary accommodation to spur an economy that has considerable slack. Real GDP is estimated to be running at 5.9% below its potential, with industrial capacity utilization at levels indicative of a disinflationary environment. Blah, blah, blah.
Blah manufacturing The Dallas Fed report showed August manufacturing activity in Texas slowed, though less than expected, while the Richmond reading of activity remained in contraction territory. The August Chicago PMI remained unchanged but expansionary, though within the report, production, new orders and employment all saw notable increases. Nationally, July factory orders surprised on a jump in volatile transportation orders. Ex-transportation, orders rose moderately and were indicative of a slowing manufacturing sector.
What else
Keep working, Mario ECB President Mario Draghi cancelled his planned speech at Jackson Hole, saying he had too pressing a workload in advance of the September meeting of the eurozone central banking chiefs. When the eurozone cracked in the summer of 2011, Germany and France were still puffing ahead. This year, the European heartland has given way to full-blown contraction to include Germany.
Election watch Two University of Colorado professors who have built a predictive model that emphasizes economic data from all 50 states and focuses on Electoral College results has correctly predicted the presidential winner in the last eight elections. Their latest study predicts Romney wins 52.9% of the vote vs. Obama at 47.1%. … The percent change in real disposable income during the Obama administration—Sentier Research says real median household income fell 5% to $51,000 between June 2009-June 2012, more than the 2.6% drop during the Great Recession (December 2007-June 2009)—is the lowest of any incumbent president who lost reelection going all the way back to 1968 … Obama won 66% of the youth vote in 2008, but he is only polling at 43% today.
More than a piece of artwork A 2,500 pound ice sculpture carved to spell “Middle Class” melted away this week in Tampa, site of the Republican National Convention. A piece is planned for next week’s Democratic convention in Charlotte.
