Weighing The Week Ahead: Should Investors Fear A Market Top?

The calendar is modest, with the big reports all hitting last week. Investors will never have more current information on the economy, the Fed, corporate earnings, and various risks than they do right now. It is difficult to guess what the punditry will do when given an open slate. We should be asking: Should we fear a market top?

Last Week Recap

In last week’s installment of WTWA, I took note of the avalanche of relevant data, suggesting that it was time for some synthesis and analysis. I didn’t expect any help from the pundits, who analyzed piecemeal as expected. I hope that readers did better by using my suggested framework. More about that below.

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, who packs a lot of relevant information into the weekly chart without sacrificing clarity.

In another quiet week, the market was virtually unchanged. The trading range was only 1.8%. The volatility seemed higher to some, because of the two-day decline after the Fed meeting. As always, our indicator snapshot in the quant section below summarizes volatility and the VIX index in various time frames.

Noteworthy

Mrs. OldProf wishes everyone a happy Star Wars Day (May 4th, for those who need a hint). RIP Peter Mayhew.

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.

When relevant, I include expectations (E) and the prior reading (P).

New Deal Democrat’s high frequency indicators are an important part of our regular research. In his post this week, Further Trend Toward Positive Numbers Could Signal A Renewed Boom, he reports that indicators in all time frames have become more positive. NDD remains skeptical and is watching indicators closely.

The Good

  • Personal spending rebounded 0.9% even more than the expected 0.8% and P of 0.2%. But see personal income below in the “bad” section.
  • Core PCE registered no increase versus the 0.1% expected and prior. The overall index was up 0.2%.
  • Earnings growth remains strongBrian Gilmartin describes the positive revisions to the S&P 500 estimates – now taking the lead over negative changes. John Butters (FactSet) updates earnings season results, which continue a beat rate higher than we have seen in the last five years. Here is the sector breakdown.

  • Consumer confidence for April registered 129.2 better than the expected 125.3 and P of 124.2. Bespoke’s analysis includes the charts we have come to expect and the reasons behind the rebound. I enjoyed meeting their chief global strategist, George Pearkes, at last weeks National Association of Active Investment Managers meeting in Phoenix. George gave a fine presentation to the entire group and answered questions with aplomb.

  • Factory orders increased by 1.9% in March, beating expectations of 1.6% and much better than February’s decline of -0.3%, revised from -0.5%.
  • Pending home sales bounced 3.8% in April, beating expectations of 1.1% and the prior month decrease of -1.0%. Calculated Risk reports and comments on seasonal factors in home prices, which increased during the bubble and have declined since.

  • Q1 productivity increased by 3.6% nicely beating expectations of 2.3% and the prior of 1.3% (revised downward from 1.9%). (Scott Grannis).

  • Employment gains were strong as measured by payrolls. The ADP and official reports, using alternative methods, are both important to those wanting a strong factual basis.

    • ADP private employment increased 275K. (E 170K and P 151K revised up from 129K). (ADP). Remember those who sifted through last month’s numbers until finding a subset of small business where there was a decline of 8000 jobs? I guess they couldn’t find one this month.

  • Payroll jobs increased 263K. (E 200K and P 189K). James Picerno provides an early take with reactions from some key economists.

My own quick take was that it was not as good as it seemed, but my own concerns related to the Household survey.

New Deal Democrat, rather dour of late, identifies leading indicators of a slowdown or a recession.

My FATRADER colleague, Eric Basmajian, prefers to use a second derivative approach, measuring the pace of deceleration. He also highlights key sectors showing weakness, especially jobs in auto production.

Meanwhile, the headline number, and the low unemployment rate, dominated the headlines for regular news shows. It was also great for political spin. There is nothing unusual about that, except that the participants have changed sides.

The Bad

  • The ISM manufacturing index, the only one of the PMI measures that has a long history, declined to 52.8, missing expectations of 55.0 and last month’s 55.3. Read the official ISM site for some color, including border delays with Mexico and suppliers moving out of China to avoid tariffs. ISM data suggests that a reading of 52.8, “if annualized, corresponds to a 2.9% increase in real GDP.”
  • Light vehicle sales for March were only 16.4 million (SAAR), 5.7% lower than in February. The series is pretty noisy, including the erratic effects of holiday promotions. Jill Mislinski’s chart shows both the actual sales for each month as well as a moving average.

  • The FOMC rate decision was exactly in line with expectations. A word or two in Chairman Powell’s press conference let to a negative market reaction. Top Fed analyst Tim Duy explains how The Fed Muddled Its Inflation Message. Here was the reaction (via the Daily Shot).

  • Construction spending declined by -0.9% worse than the expected gain of 0.1% and February’s (downwardly revised) gain of 0.7%.
  • Hotel occupancy decreased on a year-over-year basis. It is down -1.4%. Another alleged Easter effect? (Calculated Risk).
  • Rail traffic declined on a year-over-year basis. (Steven Hansen, GEI).
  • Initial jobless claims remained a bit off the levels of a month ago. 230K was the same as the prior week, suggesting that the “Easter timing” explanation was not correct.
  • ISM non-manufacturing declined to 55.5 from last month’s 56.1 and missing expectations of 57.4. The ISM official site provides detail and color. They state, “The past relationship between the NMI® and the overall economy indicates that the NMI® for April (55.5 percent) corresponds to a 2.4-percent increase in real gross domestic product (GDP) on an annualized basis.”
  • Employment reflected by the household survey was very different from the payroll report. The BLS reported an unemployment rate of only 3.6%, and that was the newspaper headline. Unemployment did decrease by 387,000, but the labor force declined by 490,000. Business cycle expert Bob Dieli gave the Household report a grade of “F.” The WSJ chart (see the full article for much more) shows the downtick among prime-age workers.
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