The economic calendar is light, but it really would not matter. The defeat (via retreat) of the effort to replace Obamacare will dominate financial market stories this week. The pundits will be asking:
What does the health care decision mean for stocks?
Last week the news was mostly positive, but irrelevant. Markets were focused on the Obamacare repeal decision.
In my last WTWA (three weeks ago since my vacation included two weekends) I predicted a discussion about the expected change in Fed policy and the effect on stocks. That now seems like ancient history, but it was a pretty good theme for that week.
The Story in One Chart
I always start my personal review of the week by looking at this great chart from Doug Short via Jill Mislinski. She notes the overall loss of 1.24%, largest since last October. You can also clearly see the Friday fluctuations around the health care breaking news.
Given the time since our last post, let’s catch up with this longer-term chart.
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, including the size and frequency of drawdowns.
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 slightly negative.
- Durable goods rose 1.7%.
- Earnings growth remains solid. Energy has weighed down earnings over the last few years. The general assumption is that earnings estimates are too optimistic. FactSet reports that the expected y-o-y growth in Q1 is 9.1%. You probably do not see that data very often, unless you are wisely following Brian Gilmartin, who has been on top of this story for many months.
- Rail traffic growth continues although the pace is a bit slower. Steven Hansen has the full story, including charts and analysis.
- New home sales increased 6.1%. Calculated Risk, the go-to source on housing matters, calls this a solid report. Despite the 12.8% y-o-y increase, Bill notes the downward revisions to prior months. The key upcoming issue is whether builders will provide affordable housing.
- Jobless claims increased to 258,000.
Existing home sales dropped 3.0%. This was also a small miss of expectations. New Deal Democrat embraces the overall housing strength, calling this the “least important” housing indicator. Calculated Risk has an important summary about existing sales:
To repeat: Two of the key reasons inventory is low: 1) A large number of single family home and condos were converted to rental units. In 2015, housing economist Tom Lawler estimated there were 17.5 million renter occupied single family homes in the U.S., up from 10.7 million in 2000. Many of these houses were purchased by investors, and rents have increased substantially, and the investors are not selling (even though prices have increased too). Most of these rental conversions were at the lower end, and that is limiting the supply for first time buyers. 2) Baby boomers are aging in place (people tend to downsize when they are 75 or 80, in another 10 to 20 years for the boomers). Instead we are seeing a surge in home improvement spending, and this is also limiting supply.
Hate groups in the U.S. are flourishing. GEI Editor John Lounsbury regularly includes articles that you might miss otherwise, including this important story.
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’s award goes to Charlie Bilello, whom we also featured on Stock Exchange. This is double recognition that is unlikely to be repeated!
Why is this so important? Because so many are being “scared witless” (TM OldProf euphemism).
Most pundits, media, “smart money”, experts on valuation have been completely wrong for many years. If you have wisely stuck with the fundamentals, you are called part of a “sucker’s rally.”
For some years, the top “fear indicator” has been VIX. No matter that few understand how it is calculated. The VIX has remained low, despite the insistence of many that risk is high. Instead of accepting the results of an indicator embraced for many years, the true believers take the only course possible: Find a new indicator!
Many of them have seized upon SKEW, which shows that the risk of a crash has never been higher. Bilello’s analysis pushes deeper, asking the excellent question of how predictive SKEW has been in the past.
The conclusion is that widely-perceived fear, whether in regular options or tail risk, does not predict a severe decline.
What does? A business cycle peak (AKA a recession). That is the reason for our careful monitoring of that topic.
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 rather light week for economic data.
The “A” List
- Consumer confidence (T). This is the Conference Board version. Will the amazing strength continue?
- Michigan sentiment (F). The Michigan version, which includes a continuing panel in the sample, is important.
- Personal income and spending (F). Until and unless more business spending kicks in, consumers are crucial.
- Initial jobless claims (Th). The series seems to be flattening at record low levels.
The “B” List
- PCE prices (F). The favored Fed measure is approaching the 2% target.
- Chicago PMI (F). Best of the regional indicators gets special attention as a hint about the ISM report.
- Wholesale inventories (T). Advance Feb data. Desired or undesired? That is always the question.
Crude inventories (Th). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.
The Fed Speakers Bureaus have been busy. Expect a daily dose of FedSpeak.
Next Week’s Theme
There is little in the way of scheduled fresh news. The health care vote came at the end of the day on Friday. It will be open season for the punditry. Speculating about the President, the legislative agenda, the Speaker, and the market provides plenty of grist. The commentary next week will raise the question:
What does the failure of the Obamacare repeal mean for stocks?
Once again, there is a hidden question which will be the focus for most – the impact on the Trump agenda. While health care is important, the market strength is more related to tax issues and infrastructure spending. Here are the key viewpoints:
- The defeat weakens the President and signals lower chances for the economic agenda.
- Getting this issue out of the way permits more rapid attention to corporate tax reform.
These issues are most important to those who believe that the post-election rally is all about Trump. More observers are joining me in crediting the stock strength to