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Weighing the Week Ahead: Time to Look Past the Gloom?

We have a huge week for economic data. The Fed is now on hold until after the election. The election can still go either way. It is easy to find something to worry about. That said, the fourth quarter is usually good for stocks.

Should investors look past the gloom?

Last Week

There was plenty of economic news, and it was generally positive. The election had a lean to Clinton, which the market seems to like, but not a decisive verdict. There were two wild cards – the rumors about an OPEC deal and the concerns about Deutsche Bank. Both introduced day-to-day volatility, but not a lasting effect. The jury remains out on both.

Theme Recap

In my last WTWA, I predicted a focus on the first presidential debate, wondering if this would provide a clear path for investors. That was half right. The debate dominated discussions early in the week and post-mortems continued for a couple of days. There was no clear KO, so the election effects are still in doubt.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. Stocks had a flat week and a rocky path.

[drizzle]

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. You can easily see the whipsaw on the OPEC and Deutsche Bank stories. In a break from recent trends the market traded inversely with oil early in the week before the “OPEC rally.” Some attributed this to the debate. The Deutsche Bank story sent markets lower on Thursday, with many seeing another “Lehman moment.” One day later, the pundits explained why the circumstances were not the same as in 2008. Who really gained from the scary stories on Thursday?

The News

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!

The Good

  • Earnings are set to improve. Earnings guru Brian Gilmartin has been on this theme for weeks and adds to the evidence. Dr. Ed Yardeni joins in, suggesting that Q2 was the trough.

 

The Bad

  • Pending home sales declined 2.4%, missing expectations.
  • Restaurant performance decreased 1% from July. Several sources are citing a “restaurant recession.”
  • Deutsche Bank faces a large fine, possibly requiring more capital. Many worry about effects on other banks. Some hedge funds have reduced trading and maintaining collateral with DB.
  • Durable goods production showed no increase.

 

The Ugly

Potential hacking of US elections. While it is unlikely to change the outcome, it is important that results are perceived as legitimate. (Yes, I have heard of Mayor Daley). Even Nixon accepted the 1960 results. The CFR opines that Congress should warn Russia.

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. This week I want to highlight Evidence Soup, by Tracy Allison Altman. She definitely has the right idea in her work. This week’s theme of whether immigrants disrupt US employment is both important and timely. She highlights evidence that supposedly disproves this notion, but there is a lot of work in evaluating it. I sympathize with this challenge. What do you think?

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.

The Calendar

We have a very big week for economic data. While I watch everything on the calendar, you do not need to! Check out WTWA to focus on what is really important – and ignore the noise.

The “A” List

  • Employment report (F). Rightly or wrongly, even rather small changes create large reactions.
  • ISM Index (M). Rebound expected in a private indicator with some leading qualities.
  • ADP private employment (W). A strong measure of employment changes, deserving of more respect.
  • Auto sales (M). Private data on an important growth sector.
  • Initial claims (Th). The best concurrent indicator for employment trends.

The “B” List

  • ISM Services (W). Not as interesting as the manufacturing index, but only because the series is shorter.
  • Construction spending (M). Important sector, but August data.
  • Trade balance (W). Important part of the GDP calculation for Q3.
  • Factory orders (W). Volatile August data, but an important sector.
  • Crude inventories (W). Often has a significant impact on oil markets, a focal point for traders of everything.

 

Did you get enough FedSpeak after the FOMC meeting, the press conference, the speeches last week, and the Yellen Congressional testimony? No? If not, you will have several more opportunities to get even more transparency and clarity this week!

Next Week’s Theme

Despite warnings to sell in May, the worst month of August, and the dangers of September, stocks have posted another positive quarter. The fourth quarter is positive over 80% of the time. But wait! To some the list of worries seems more important than usual. The biggest include the following:

  • Election uncertainty
  • Recession chances/economic weakness
  • Length of the bull market
  • Misleading corporate earnings

These factors have most market participants in a gloomy mood. The market resilience this year will have the pundits wondering: Is it time to look past the gloom?

The ever-witty Alan Steel wonders if sentiment is detached from reality.

Yes, and it’s always been that way; the consensus of opinion and the investor herd move in exactly the wrong direction at exactly the wrong time.

That’s because investors rarely focus on anything beyond what they’re hearing and seeing today.

And in the words of our good friend Mike Williams of Genesis Asset Management in Chicago, “It’s not what’s now that matters, it’s what’s next.”

Bill Kort uses actual reader counts to demonstrate the effect of negative headlines – SELL ALL STOCKS!!!. He notes, “The articles I publish with overtly negative titles draw far more readers than those with neutral to modestly negative elements”.

As always, I’ll have a few ideas of my own in the conclusion.

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