Weighing The Week Ahead: Should We Worry About Indicators That Decline From A Peak?

We are back to a normal economic calendar, with Congress in session and plenty of Fed Speak. Until the government shutdown ends, I expect that to get maximum news coverage, followed by the President’s latest legal troubles. Since these are not the most important market stories, I want to examine more closely the debate about economic indicators rolling over. Some of the punditry will join me in wondering: How worried should we be about economic indicators declining from a peak?

Some see this as a relatively normal decline from an overly exuberant pace of growth. Others see it as the first signal of imminent disaster. Let’s take a closer look.

Last Week Recap

In my last edition of WTWA I asked readers to treat the new year as a blank slate. Rather than focus on recent events, I encouraged some long-term thinking. Others added to my list, and it seemed to be a good exercise.

I also posted my annual preview. This highlights the factors I see as most important in the year ahead. 

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. She includes a lot of relevant information in a single picture – worth more than a thousand words. Read the full post for more great charts and background analysis.

Stocks gained 1.85% on the shortened week, but it was a wild ride. The trading range 3.85%. While lower than last week’s range, it is still high – especially when it happens in two days. Our indicator snapshot (below) tracks actual and implied volatility over various time frames.

Noteworthy

People get fixed in the moment, unable to see the future partly because they make the wrong inferences from the past. I am concerned about those who are obsessed with the rebound of specific stocks, which they see as crucial to market strength. In fact, the leadership is always changing. I’ll return to this theme in a future post, but for now, let’s look at Internet stocks. The Visual Capitalist has (yet another) great look at an important topic, The 20 Internet Giants that Rule the Web. Notice the dramatic turnover!

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. This week’s update shows that the short-leaning indicators have joined the long-leading group in neutral. It will be interesting to see how this mixed picture plays out. NDD observes that some weakness first showed up in the long-leading indicators about seven months ago.

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

The Good

  • Rail transport improved in the “economically intuitive” sectors identified by Steven Hansen (GEI). He uses a rolling average to smooth this very noisy series. This chart illustrates his conclusion.

The Bad

  • Initial jobless claims increased to 231K from the prior week (and expectations) of 220K.
  • ISM Manufacturing declined to 54.1 from a prior of 59.3 and expectations of 57.8. The ISM site provides plenty of useful detail. New orders declined from 62.1 to 51.1 and the comments reflected a general slowing pace. It is worth noting that the ISM’s own research concludes that a 54.1 reading, if annualized, would reflect real GDP growth of 3.4%.
  • Apple issued a rare profit warning. This stimulated plenty of debate about the reasons: products, pricing, weaker economic growth, or tariffs. John Gruber has an interesting analysis which lays most of the blame on the company itself. (I heard other estimates that this is 80% an “Apple problem.”) The announcement had a dramatic impact on the overall stock market and a wide range of sectors – virtually anything that had any link to China.
  • Q418 earnings estimates have declined sharply. John Butters (FactSet) compares the 3.8% current decline with past time periods. Hint: It is worse than the five-year average but better than the ten- or fifteen-year averages.

The Ugly

Government shutdown effects. You are seeing it on every news show. 800,000 workers not paid, although some are required to work. Important and popular services not provided. No guarantee of eventual reimbursement for some outside contractors. And no end in sight. Here is one summary with links to others. What if you owned a business catering to National Park tourists?

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Disclosure:[If you are confused about the current market and unsure how to react, you might want to request some of my papers for individual investors. We can generate extra income from stodgy ...

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