We have normal week for economic data, and a big week for earnings reports. The last Presidential debate will grab headlines. We have been monitoring these factors for weeks, but something new is showing up in the data. Let’s call it a “stealth rotation” from bonds to stocks and from bond substitutes to less favored stocks. If the punditry carefully watches the data, they will be asking:
Has a market rotation begun?
Last week’s news was pretty good, despite the negative reaction in stocks.
In my last WTWA, I predicted special attention to the early earnings reports and questions about whether the earnings recession was ending. That was a reasonable guess, although most of the commentary seemed to focus on a couple of big earnings misses. There was also plenty of competition from some surprising China data, the ongoing Fed debate, and of course, the election news.
The Story in One Chart
[drizzle]I always start my personal review of the week by looking at this great chart from Doug Short. Stocks had a negative week. You can see the opening gap on Thursday after the Chinese trade data, and also Friday’s failed rally.
Doug has a special knack for pulling together all of the relevant information. His charts save more than a thousand words! Read his entire post where he adds analysis grounded in data and several more charts providing long-term perspective.
Each week I break down events into good and bad. Often there is an “ugly” and on rare occasion something really good. My working definition of “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!
- JOLTS continues to show a solid labor market. Chair Yellen uses it as a signal for a tight labor market. The healthy “quit rate” shows that many people are comfortable in voluntarily leaving jobs. Some reports focused strictly on the number of job openings, which is a poor use of the data.
- Initial jobless claims also show labor market strength.
- Retail sales provided the week’s best economic news, rising 0.6%, the best increase in three months. (Bloomberg)
- Corporate earnings nicely beat expectations. FactSet has some interesting early data – 76% of the reporting companies have beaten earnings expectations and 62% have beaten on sales.
- Import container counts are again lower. Steven Hansen (GEI) smooths out the effects of the Hanjin Shipping bankruptcy and finds a troubling trend. Does it portend weak holiday spending? The chart below is the year-over-year change in the three month moving average.
- Chinese exports and imports both declined more than expected.
- Q3 GDP estimates edge lower as more data is reported. Calculated Risk summarizes the move from various sources. Here is one example:
- Michigan consumer sentiment slips to 87.9 in the October preliminary report. Jill Mislinski updates the story and the terrific Doug Short chart combining multiple elements of the story in a single look.
The political sideshow. There were polls to determine the “winner” of the debate. Not so long ago debates were seen as a way for the trailing candidate to show equality of stature – same stage, same rules, etc. Many challengers have used this effectively. It is also a way to demonstrate that a “Presidential” image. If an expert from years ago, without any context, read the transcript of this “town hall forum” debate s/he would not believe it. Campaigns are ever-more focused on the undecided or uncommitted voters, especially in the key states. Suppose for a moment that these voters may not have been the ones sitting at the front of the class. What do we expect the campaigns to do? The sound bite negative ads are one approach, but this is reaching a whole new level – and not a high one.
The most important thing you can do as an investor is to vote your conscience while still using sound, unemotional judgement concerning your personal finances.
The Silver Bullet
I occasionally give the Silver Bullet award to someone who takes up an unpopular or thankless cause, doing the real work to demonstrate the facts. No award this week. Nominations welcome. I also note that Dr. Ed Yardeni joined us in applauding the Justin Lahart article on CAPE. Dr. Ed provides his own thoughts about market valuation and the advantages of forward earnings.
I am not a fan of valuation measures based on trailing earnings, especially if they trail over the past 10 years. I believe that the stock market is forward looking and discounts analysts’ consensus expectations for earnings over the year ahead. More specifically, I use S&P 500 12-month forward consensus expected operating earnings, which is a time-weighted average of analysts’ expectations for the current year and the coming one.
The Week Ahead
We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react. That is the purpose of considering possible themes for the week ahead. You can make your own predictions in the comments.
We have a fairly big week for economic data, as well as earnings reports. I watch everything on the calendar, so you do not need to! Check out WTWA to focus on what is really important – and ignore the noise.
The “A” List
- Housing starts and building permits (W). Important forward looking data on a crucial sector.
- Industrial production (M). Volatile September data. Any sign of a rebound from last month’s loss?
- Fed Beige Book (W). Prepared for the next FOMC meeting, this provides color from each Fed district, going beyond the data.
- Leading indicators (Th). Widely followed, despite some controversy. Rebound expected from last month’s negative reading.
- Initial claims (Th). The best concurrent indicator for employment trends.
The “B” List
- Existing home sales (Th). Without the impact of new homes, but still a good read on the overall housing market.
- CPI (T). Inflation is still not very important, and it will not be until there are a few higher months.
- Philly Fed (Th). Has earned some respect as one of the few regional indicators that can move markets. The first October data.
- Crude inventories (W). Often has a significant impact on oil markets, a focal point for traders of everything.
More important than the economic data will be continuing earnings news.
Next Week’s Theme
The Presidential campaign and the final debate continue to dominate the news. The regular economic data this week include important leading indicators about housing. These will not get the attention deserved. Corporate earnings reports will also get some attention, but the emphasis seems to be on spectacular “misses.” Did you even realize that the earnings season is positive so far? Unless you look at the FactSet data, you would not know.
Through this haze there have been a few glimmers of a new trend. If you are alert, you will see more attention to the question:
Has a market rotation begun?
There is some evidence.
- The ten-year note has moved noticeably higher while the yield curve has steepened.
- Utilities are losing ground while banks