Weighing The Week Ahead: Should Investors Bank On The Fed?

The economic calendar is important, featuring inflation data, two elements of the NBER “big four,” consumer confidence, and the JOLTS report. Those needing a fix of FedSpeak are out of luck since it is the quiet period for them. The data all point to an intersection between economic strength and the Fed. The question for stock investors will be: Should equity investors rely on the Fed to support stock prices?

Last Week Recap

In last week’s installment of WTWA, I expected a search for meaning in the conflicting market messages. I also predicted that developments on the imminent tariffs on Mexican trade would be our biggest “tell.” Markets certainly found a direction, but there is no consensus on meaning. No one really knows what to expect next.

The Story in One Chart

I always start my personal review of the week by looking at a great chart. This week I am featuring Jill Mislinski’s great combination of many important elements in a single chart.

The chart shows a gain 4.4% on the week. The trading range of 5.7% is higher than recent weekly results. The dramatic reversal this week highlights the news-driven trading. Our weekly Indicator Snapshot provides a handy history of both actual and implied volatility.

Noteworthy

If an index based upon implied volatility is your preferred measure for fear, you might want to compare stocks and bonds. Here is the Merrill Lynch MOVE index versus VIX, courtesy of The Daily Shot.

The News

Each week I break down events into good and bad. For our purposes, “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.

New Deal Democrat’s high frequency indicators are an important part of our regular research. His long-term and nowcast indicators remain positive, while short-term is negative. He has provided his answer to our key question this week:

At the most basic level, higher interest rates last year, plus chaotic trade and tariff decisions, are causing near term metrics to be increasingly negative. But they are also leading to a cratering of interest rates and a surrender by the Fed to the need to lower those interest rates. The question for the economy going forward is, which force is more powerful?

The Good

The U.S. and Mexico reached agreement on a plan to avoid the imposition of tariffs. There was speculation about this during the week, but until Friday evening there was no confirmation from the President. Fox Newsdeclares it to be a victory for Trump’s approach. The New York Times reports that the immigration changes were agreed upon months earlier. Next week will provide some insight into how much of this was anticipated by financial markets. Part of the agreement was the Twitter promise, “Mexico has agreed to immediately begin buying large quantities of agricultural product” from the U.S. Since this was not a part of the joint declaration, it is something to watch in the coming week. The Wall Street Journal coverage also included this helpful graphic showing the large role Mexico plays in U.S. commodity imports.

  • The Fed’s Beige Book showed continuing moderate economic growth in the reports from the various Fed districts. Steven Hansen (GEI) always has excellent coverage of this release. He carefully compares the narrative to prior periods and reminds of us terms used when the economy is entering a recession. This indicator was not helpful before the last two recessions!
  • Light vehicle sales increased 5.9% month-over-month. Jill Mislinski provides an in-depth analysis with charts illustrating several approaches. This one shows a key theme.

  • Initial jobless claims of 218K last week, equaled the prior month and slightly beat expectations of 220K. I am reporting this small beat in response to some good reader questions about this data series. Some have noted that the eligibility criteria were relaxed during the great recession, allowing a longer period of benefits. Many states have toughened up standards since then, which would reduce the number of continuing claims. Jill Mislinski provides an excellent update that provides a more informative slant. She looks at the claims as they relate to a growing labor force. This underscores the current record levels. Her post also shows continuing claims and the way both data series react during recessions. It is a great resource for those interested in this topic.

  • ISM Services for May posted a reading of 56.9, beating both expectations of 55.4 and the April reading of 55.5. Here is an interesting chart showing the growing significance of services for the U.S. economy.

  • Household Net Worth increased in Q1. Calculated Risk describes the regular Fed Flow of Funds report, combining helpful charts with some specific facts. The value of household real estate increased to $26.1 trillion in Q1. Over 30% of owner-occupied households have no mortgage debt. About two million homeowners still have negative equity.
  • Sentiment is more bearish, widely regarded as a contrary signal. Bespoke has several charts, including this one:

The Bad

  • ISM Manufacturing for May registered 52.1 versus 52.8 for April and missing forecasts of 52.6.
  • Construction spending for April was flat, missing expectations for a 0.4% gain. March was revised higher, however, from a decline of -0.9% to an increase of 0.1%. This type of revision often affects the following month.
  • Revenue and earnings declines for companies with significant global exposure. John Butters (FactSet) analyzed this differential. Brian Gilmartin takes a more comprehensive look at estimate changes, featuring the importance of the top 10 S&P stocks by market cap.
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Disclosure: [If you are an investor who has exited stocks because of the incessant bearish headlines, you are not alone. Do not let ratings or commission-driven forces cause you to abandon your ...

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