Weighing The Week Ahead: Major Market Misperceptions

We have a light economic calendar with a focus on housing. Earnings season would normally be the most important market theme. For now, observers are seeing what they want to see in earnings reports. That makes it easier for pundits to take up a favorite topic:

What is about to go wrong?

There are so many candidates that picking one as a theme would be a pure guess – even more than usual. Sticking with my promise to focus on the most important questions, regardless of pundit preferences, I am going to summarize the most important current market misperceptions.

Last Week Recap

In my last edition of WTWA I asked whether earnings season would spark a rebound in stocks. That was indeed a frequently discussed topic. For part of the week, it looked like the answer would be “yes.” At week’s end, that issue is still in doubt.

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 the futures chart from Investing.com. The image posted here shows a static view. If you go to the site, you can check out the news at various points during the week and adjust the view in many other ways. Since futures trade when the stock market is closed, you can also see that trading.

The market was virtually unchanged on the week. That seems amazing to those who were watching it play out. The weekly trading range was 2.7 % — less than last week, but larger than we have experienced over the last few years. The VIX implied volatility measure remained higher than the actual results which are only slightly higher than the long-term average. I summarize actual and implied volatility each week in our Indicator Snapshot section below.

Noteworthy

I trust that the my astute readership has strong and varying passwords. If you have many accounts, you need a password manager. I use Dashlane and monitor their blog, where I ran across the 2018 NFL Password Power Rankings. Noting that her Packers were only #10, Mrs. OldProf said the results should be population-adjusted. (I think the model requires an intelligence variable as well!)

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. They remain positive overall but have weakened somewhat in all time frames. The long-term indicators have drifted back to the neutral range.

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

The Good

  • Earnings news – good so far. FactSet reports that 80% of companies have a positive earnings surprise and 64% a positive sales surprise. These are both better than the average result. The year-over-year growth has been 19.5%. The size of the beats is a bit less than average. Guidance has also been better than expected. The earnings news has been strong, but without much market reaction.

  • Builder Confidence increased in October. Calculated Risk provides the analysis of the small beat over last month and consensus forecasts, concluding it to be “a solid reading.”

  • The JOLTs report was again very strong, up over 18% year-over-year. David Templeton writes, “This is not the type of data output that occurs in a recessionary environment.”

  • Some labor slack remains demonstrates Matthew C. Klein (Barron’s). He looks at the “super prime age” employment population and the increase in part-time workers resuming full-time jobs. The lack of wage pressure is the result.

The Bad

  • Housing starts registered only 1201K (SAAR). P 1268K E 1230K. Calculated Risk notes that starts are up 6.4% year-to-date compared to 2017. The comparisons will now be getting tougher. Bill’s continuing view is that there will be further growth in housing starts.

  • Building permits for September were 1241K (SAAR). P 1249K E 1273K.
  • Existing home sales for September were 5.15M (SAAR). P 5.33 M E 5.30M. Calculated Risk notes that this is a “reasonable level” and less important than new home sales. While the YoY decline is small, it may reflect rising mortgage rates and the limitations on property tax deductions.
  • FOMC minutes should not really have been a surprise, but the market was troubled by the apparent willingness of the committee to raise rates beyond neutral.
  • Retail sales for September increased only 0.1% P 0.1% E 0.6%.
    Jill Mislinski tracks the data, noting that growth has been rising less than the post-recession trend for the last three years.

The Ugly

Flood insurance in a World with Rising Seas is a study by Queens College, City University of New York researchers. The research notes the perverse incentives provided by government flood insurance, “$23 billion in the red as of 2016”.
Coastal development and property values increase despite the higher risks of flooding.

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.

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Gary Anderson 8 months ago Contributor's comment

Sanguine assessment. The Fed is still loose. But EMs and prospects for a big trade war with China, along with a majority of workers seeking no increase on their paychecks, could weaken a forward looking market. Time for retail investors to pull back and leave the markets to the pros.