We have a normal calendar for economic data. There will be important news will come from corporate earnings reports. Since this earnings season is part of an inflection point – the end of the earnings recession– it is special. That said, the uncertainty over policy change has market observers both divided and on edge. I expect the earnings news to get less attention than normal. With the queasy, uncertain feeling, the pundits will be asking:

Will policy uncertainty lead to greater stock volatility?

Last Week

Last week the economic news was strong, but with little reaction from stocks.

Theme Recap

In my last WTWA I predicted a close watch on earnings to see if these reports confirmed the improvement in economic data. There was plenty of attention to earnings, but not much on the economic strength theme. Pundits loved to discuss the various Trump appointees and speculate on the stock implications. At some point the market will refocus on the regular themes. For now – like it or not – the Trump effect is a big part of the daily discussion.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. As has been the recent case, both the range and the weekly change were very small. Doug attributes the Friday pullback to an Inaugural Address that offered little for the wealthy. He offers more analysis in his commentary. (Personally, I do not find any of the moves big enough to merit discussion, but there was plenty of commentary).

Doug has a special knack for pulling together all the relevant information. His charts save more than a thousand words! Read his entire post for several more charts providing long-term perspective.

Personal Note

Since I will be enjoying a Winter weekend away with Mrs. OldProf and friends, I will probably not write next weekend. As always, I’ll be watching, and may post a brief update if it seems necessary.

The News

Each week I break down events into good and bad. Often there is an “ugly” and on rare occasion something very positive. 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!

This week’s news was again quite good—almost all positive. I make objective calls, which means not stretching to achieve a false balance. If I missed something for the “bad” list, please feel free to suggest it in the comments.

The Good

  • Industrial production rose 0.8%. This beat expectations of 0.6%, but the prior month was revised lower by about the same amount. This series is difficult to interpret in the short run.
  • Philly Fed improved to 23.6 versus the prior month 21.5. This is an exceptional gain for two consecutive months in a diffusion index. It handily beat expectations of 16 or so.
  • Initial jobless claims fell yet again. The series is now at the lowest level since 1973. To my surpriseamazement, some of the punditry is actually finding a way to make this into bad news!

  • Inflation is higher. I understand that many view this as bad news. At some level, it would be. At a time when deflation (more dangerous and harder to fight) has been threatening, a modest rate of inflation is preferred. Scott Grannis has the story, and good charts on other data as well.

  • Homebuilder confidence remains strong. Calculated Risk, our go-to source on all things housing, notes that the reading was “below consensus, but another solid reading.” Anything over 50 indicates that most builders view conditions as good.
  • Housing starts showed a big increase, but mostly because of multi-family. The volatile series remains in the range Bill McBride predicted at the start of the year (4% to 8%). The actual was 4.9%, so the bottom end of the range. More encouraging is that multi-family was down 3.1% for the year while the gains came from the 9.3% increase in single-family.


The Bad

  • Building permits had a slight decline to a seasonally adjusted annual rate of 1,210,000. This is down 0.2% from last month but a gain of 0.7% over last year. I tend to place more weight on this series than most other analysts, so I watch it closely.
  • Earnings season began on a soft note. Both earnings and revenue surprises are below the long-term averages. Only 12% of the S&P 500 companies have responded so far, and there is specific sector concentration. I’ll save the charts until we have more data, but you can check for yourself at FactSet. Also, see specific company commentsfrom Avondale, which follows the conference calls.

The Ugly

California budgeting. I have criticized my own state (Illinois) so often. This week the award goes to California for a $1.5 billion “math error.” Put enough of these together and you eventually have real money. (Everett Dirksen).


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. I welcome nominations from readers. As always, ZH is a fertile source of ideas. Write something!

We also published our annual review of winners. If you take a look at the excellent work reviewed (here and here) you will see the advantage of following these contrarian sources. You will be surprised at how much it can help your investing.

There was a popular recent post about “neglected topics.” The article highlighted the heavy hitters who basically control the agenda of what you see. I tried to respond here. I despair! I welcome suggestions about how to get more exposure for those who do great but unpopular work.
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

It is back to normal for the volume of economic data, but fewer of the most important reports.

The “A” List

  • New Home Sales (Th). More strength expected in this important sector.
  • Michigan Sentiment (F). Continued strength anticipated. Special interest in future expectations.
  • Q4 GDP (F). The first estimate gets major adjustments, but still attracts plenty of attention.
  • Leading Indicators (Th). Expected rebound from last month’s “No change.” Some swear by this report.
  • Initial jobless claims (Th). How long can the amazing strength continue?

The “B” List

  • Existing Home Sales (T). Lacks the economic effect of new sales, but a good read on the market.
  • Durable Goods (F). More stable improvement when the volatile transportation sector removed, but headline rebound also expected.
  • Crude inventories (Th). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.


Fed speakers are still on the trail. Questions will probe the new political environment, with everyone trying to dodge.

Earnings reports will remain important. Early actions from the Trump Administration will capture attention, if only because few know quite what to expect.

Next Week’s Theme


It would be nice

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