Weighing The Week Ahead: What Is Your Course For Uncharted Waters?

We have a short week and one extremely light in scheduled news and economic data. Even the Wed-Fri stretch comes before another holiday weekend. In addition, the government shutdown will delay scheduled reports. Given the continuing divergence between economic news and market prices, that might not matter!

Pundits have plenty to talk about. We are beginning to see articles and TV segments about “protecting your portfolio.” This has been a challenge with declines in all asset classes and little solid evidence for the reasons. We can expect more to be asking:

What is your course for uncharted investment waters?

Last Week Recap

In my last edition of WTWA focused on the contrast between the daily investment stories and the outlook from major investment leaders. Considering their conclusions, I wondered “what might go right.” That guess was good for a time. While data continued to be solid, the market reaction was terrible. Speculation about the underlying reasons became the main story.

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 Investing.com. If you go to the source page, you can use the interactive version, letting your imagination roam. Especially valuable are the indicators of news at various times.

The market declined 7.0% for the week. A brief rally on Monday did not hold, nor did the pre-Fed move on Wednesday. The trading range was also seven percent. Readings on actual and expected volatility are included in our Indicator Snapshot.

Personal Note

I am planning some family time for the holidays, so posting will be light and probably no WTWA next weekend. I will be working on my annual preview post. We’ll see if Mr. Market gives me enough time to finish that in the next few days. I hope that today’s post covers the most important themes, more relevant right now than highlighting individual stocks.

There is a little trap in today’s post, explained in the conclusion. I hope you enjoy it.

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 long-leading indicators remain neutral while other time frames remain positive. NDD has some excellent advice for data watchers:

I want to add a note this week that I think people are getting ahead of themselves, projecting weak trends to weaken even further, and assuming that means recession. It has struck me this week how in many ways the current situation reminds me of year-end 1994. Alan Greenspan was aggressively raising rates in the face of non-existent inflation. Sentiment turned awful, and portions of the yield curve briefly inverted. And then … it didn’t happen. There was a big slowdown in 1995 followed by a big rebound. I’m not on recession watch now, and I won’t go on recession watch unless and until the broad range of data justifies it.

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

The Good

  • Housing starts showed strength with a SAAR of 1256K E 1230K P 1217K. The strength was mostly fueled by the volatile multi-family sector. Calculated Risk explains. He notes that single-family starts were down 13.2% YoY, the weakest in the last eighteen months. Despite this, starts are up 5.1% compared to last year.

  • Building permits registered a strong SAAR of 1328K E 1270K P 1265K.
  • Existing home sales registered a 5.32M SAAR E 5.20M P 5.22M. (Calculated Risk).
  • Initial jobless claims remained low at 214K E 221K P 206K
  • Personal spending increased at a rate of 0.4% E 0.3% P 0.8% revised up from 0.6%.
  • PCE prices, the favorite Fed measure, increased only 0.1% on the headline and core. E for core was 0.2%
  • Leading indicators increased 0.2%, beating expectations of 0.1%. P 0.3% downwardly revised from a gain of 0.1%.
  • Michigan Consumer sentiment rebounded to 98.3 E 97.5 P 97.5. Jill Mislinski provides analysis and a great chart.

The Bad

  • NAHB Builder Confidence declined in December – registering 56 compared to 60 in November. (Calculated Risk).
  • Personal income increased only 0.2%. E 0.3% P 0.5%.
  • GDP for Q3 was revised lower to 3.4% from 3.5%. No change was expected.
  • Durable goods orders increased 0.8%, much better than P of -4.3% and missing expectations of a 1.7% gain. 

The Ugly

I intended to continue my holiday break from the ugly, but readers know my passion about maintaining standards in scientific research. TheBMJ published the results of a randomized controlled trial demonstrating that parachutes were not significantly better than empty backpacks in preventing death or major traumatic injury when jumping from an aircraft. Those who have read scientific reports will recognize some important lessons here.

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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