Weighing The Week Ahead: Investors Too Complacent?

The economic calendar is very light and interrupted by the mid-week holiday. We can always see volatility when volume is low, but many market participants will be on an extended holiday. This includes much of the A-team punditry, but someone will be left to fill the airtime. Some will continue the outlook theme I covered last week, but I expect many to be asking: Are investors too complacent?

It is an interesting question, especially considering recent events that suggest danger to many observers. As usual, I’ll include a range of ideas and offer some comments on each.

Last Week Recap

In my last installment of WTWA, I took note of the big economic calendar but predicted that most would prefer to discuss 2020 market forecasts. That was an accurate guess. The week was filled with such reports. The chart below shows one that I find particularly interesting. It does not represent the forecast of a single person. As John Butters (FactSet) explains, he looks at the median target price estimates from analysts covering the stocks, the same people generating earnings estimates. The prices are then aggregated to generate a forecast for the entire S&P 500 index. This contrasts with the “top-down” analysts who work from expectations for the economy, interest rates, and the most likely P/E multiple.

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 version from Jill Mislinski who combines a lot of important data into a single, readable chart.

The market gained 1.6% for the week. The trading range was only 1.3%. This can happen because I measure the weekly change based upon the prior week’s close. The trading range reflects prices during the actual trading hours, reflecting gains from last Friday even on the low points for the week. You can monitor volatility, implied volatility, and historical comparisons in my weekly Indicator Snapshot in the Quant Corner below.

Noteworthy

Which countries lead the world in scientific publications. Statista reports the numbers. Are you surprised by anything?

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. The results remain positive in both the long- and concurrent-time frames, but the short-term forecast has turned negative. NDD continues to highlight the metrics to watch if concerned about manufacturing weakness spreading to the consumer.

The Good

  • A government shutdown was averted. And the USMCA trade bill was passed. The necessity of action generated some compromise even amid the impeachment rancor. (The Hill).
  • Homebuilder confidence hit the highest level in 20 years. (Diana Olick, CNBC).

  • And Fannie Mae is forecasting a big increase in single-family starts. (Diana Olick, CNBC).

    After increasing just over 1% annually this year, growth in single-family housing starts will accelerate to 10% during 2020 and top 1 million new homes in 2021, the group predicts. That would mark a post-recession high but is still far below the annual peak of about 1.7 million single-family starts in 2005 and the 1.2 million annual pace experienced in the late ’90s.

    Single-family housing starts have been improving steadily since May, and building permits, an indicator of future construction, are also trending higher.

    “It will likely take several years, even at a more robust pace, for new construction to address the existing pent-up demand for additional housing, as suggested by a still-increasing share of 25- to 34 year-olds living at home with their parents,” according to the report.

  • Housing starts (Nov) increased to a SAAR of 1365K, surpassing expectations of 1340K and October’s upwardly revised 1323K. Despite the slow start to 2019, Calculated Risk observes that the strong finish means that starts will be higher in 2019 than in 2018.
  • Building permits for November reached 1482K (SAAR) beating expectations of 1400K and October’s 1461K.
  • Industrial production reversed October’s (downwardly revised) decline of 0.9% with a gain of 1.1%. This was better than the expected 0.8%. Part of the fluctuation was the GM strike. It is more than a one or two-month effect, as Bob Dieli explains:

    The rebound in vehicle output associated with the resumption of normal operations at GM will be a plus going forward. But, we still think that it will be second and third order effects of the trade war that will have the greatest bearing on how this sector performs going forward.

    What are the second and third order effects? Stopping the importation of Chinese steel through a tariff is the first round effect of the trade war. The diminished use of trucks to haul the steel is the second order effect. The diminished demand for fuel and truck parts are part of the third order effects.

    Ending the trade war will diminish the problems that starting the trade war created. But the adjustments to the supply chain will take some time.

  • JOLTS again hit a sweet spot. Labor markets remain strong, but not too tight. Job openings registered 7.267M for October up from September’s 7.032M, but that is only one element to consider. The coverage of this report is so poor that I am devoting some extra space this week. Below are charts from the BLS site illustrating the most important elements of labor market structure.

  • Core PCE prices showed a gain of 0.1% in November, the same rate as October and lower than expectations of 0.2%. This is good because the Fed will not feel any pressure for a rate hike.
  • Mortgage purchases remain strong. The pace continues as the best in a decade.

  • Michigan sentiment for December registered 99.3 in the final reading, slightly beating the prior 99.2 and expectations of 99.1. Jill Mislinski publishes my favorite chart of this series, including GDP and recession data with the meaningful history.

  • Personal income for November increased 0.5% surpassing October’s upwardly adjusted 0.1% and expectations for a gain of 0.3%. “Davidson” (via Todd Sullivan) calls the last twelve months “one of the most valuable investment lessons of the last 10 yrs.” He points to the extreme pessimism of Oct 2018-Dec 2018.
  • Personal spending was also slightly higher than expectations, an increase of 0.4% versus 0.3%. October was also 0.3%.
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Disclosure: [Has your portfolio kept up with the changes over the last year? If you are unsure, write for my brief paper on Four Signs of Portfolio Trouble. Just send an email request to info at ...

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