We face a modest week for economic data. While equity markets remain open, bonds will not trade on Monday (Columbus Day). Yom Kippur begins Tuesday at sundown and extends through the next day. The punditry, fueled by recent revelations as well as Sunday’s debate, will pounce on the election news. With the official start of earnings season on Tuesday and important reports by the end of the week, perhaps we can hope to see a serious market discussion before the week ends. I expect the punditry (eventually) to be asking,
Is the earnings recession over?
Last week’s news was very good, although there was little reaction in stocks.
In my last WTWA, I predicted a shift from the gloomy outlook might be improving as some of the current worries were reduced. That was a good guess for an overall theme. There were quite a few “looking ahead” pieces both on TV and in print. The other news – the election, Brexit, and flash crash news was featured on some days, but it is difficult to plan for that.
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 stayed within a range of about 1%. CNBC breathlessly noted the “triple digit moves” on several occasions. This is a great illustration of making something out of nothing.
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.
The market is at a crucial point. It is not a time for sitting on the fence. Next weekend Mrs. OldProf (hometown Green Bay) and I are headed to visit her family in Wisconsin, so maybe I should say not a time for being a “deer in the headlights.” I am planning to write next week, but I can’t be sure. Meanwhile, we have a family fight brewing for tomorrow night, with the Presidential debate at the same time as a football game.
Because of the importance, I put extra effort into this week’s WTWA edition, and I hope it is helpful. People are sometimes bashful about reaching out to us with questions. Please feel free to get in touch via main at newarc dot com.
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!
- Auto sales beat expectations, up 4.7% to an annualized rate of 17.8M. Calculated Risk puts this into perspective.
- High-frequency indicators remain strong. New Deal Democrat does an excellent weekly update, which I follow regularly. His latest report shows the strength in both long-leading and short-term indicators. The concurrent indicators are mixed. Reading this post helps to understand why many using less data are more confused about the market.
- A shortage of truck drivers? A $5000 bonus is available. Another among the many small, unremarked indicators which I follow. (Tyler Cowen)
- Home prices up 6.2% over last year according to the CoreLogic index. (GEI)
Employment reports were generally positive.
- The headline payroll number was slightly positive, including revisions. Bob Dieli’s excellent monthly employment report captures the conclusion widely shared by other top economists – “steady as she goes.”
- Jobless claims dropped to 249K.
- Labor participation increased, while the unemployment rate also increased from 4.9% to 5%.
- The work week moved higher.
- Best of all, hourly earnings increased 0.2% over August and 2.6% year-over-year.
- The median duration of unemployment is down to 10.3 weeks. (WSJ)
- ISM Non-Manufacturing made a big jump to 57.1, almost 6 points higher than last month and four points higher than expectations.
- Construction spending fell 0.7%.
- ADP Private Employment gained only 154K, down from 175K in the prior month and missing expectations. This was worse than the “official” private employment estimate.
- Commercial real estate index stumbles. Calculated Risk tracks this and provides a good update.
My original plan was the poll showing that over 40% of potential voters could not name the Vice-Presidential candidates. With the Presidential campaign in a descending spiral and a violent hurricane, my original idea seems lame. There is plenty of ugly news. We can all hope for a better week ahead.
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 Justin Lahart of the Wall Street Journal for his article, Shiller’s Powerful Market Indicator Is Sending a False Signal About Stocks This Time. The article has an excellent discussion of alternative methodologies, including an alternative profit measure that matched the results quite well until 2008. The Shiller CAPE is widely cited as a justification for not owning stocks, but both Prof. Shiller and his co-developer Prof. Harvey do not use it that way themselves. Here is the key conclusion, drawing upon the work of Prof Damodaran the leading expert on corporate valuation:
For New York University finance professor Aswath Damodaran, this is the real sticking point. He set up a spreadsheet to see if there was a way that using the CAPE could boost returns. When the CAPE was high, it put more money into Treasurys and cash, and when it was low it put more into stocks.
He fiddled with it, allowing for different overvaluation and undervaluation thresholds, changing target allocations. And over the past 50-odd years, he couldn’t find a single way he could make CAPE beat a simple buy-and-hold strategy. In the end, he doesn’t think it represents an improvement over using conventional PEs to value stocks.
“This is one of the most oversold, overhyped metrics I’ve ever seen,” says Mr. Damodaran.
Mr. Shiller agrees that the CAPE can’t be used as a market-timing tool, per se. Rather, he thinks that investors should tilt their portfolios away from individual stocks that have high CAPEs. But he says he isn’t ready to modify his CAPE for judging the overall market.
Attacking the most popular excuse for missing the rally is not a popular position. If only more journalists would step up with this kind of investigation.
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 modest week for economic data, with some holiday effects included. 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
- FOMC minutes (W). Unlikely to provide fresh news, but will still be watched closely.
- Michigan sentiment (F). Good read on current employment and spending.