Weighing The Week Ahead: Looking Beyond The Obviou

We have a small economic calendar, but another big week for earnings. Corporate earnings are not confirming those who thought the market was signaling a recession. Starved for something new to worry about, the punditry has turned to reductions in earnings estimates. This newfound interest in forward earnings provides another dimension for the gloomy set. Instead, I suggest that astute investors should consider the data while…

….looking beyond the obvious.

The obvious elements include some economic weakness in Q119 for a variety of well-known reasons. We should expect some earnings impact as a result.

Last Week Recap

In my last edition of WTWA I highlighted not only the abundance of data, but also the diversity of analytical methods to consider. Investors could review the “message” of the market, corporate earnings, the Fed, Washington events, or international threats to the economy. Alternatively, they could join me in emphasizing the trumped-up threats to the economy.

Most will summarize the week as a story about the Fed, but the other elements were also important. There really was no clear theme.

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 1.6% on the week with a trading range of 3.4%. Much of the move came after Wednesday’s FOMC decision and announcement, although there was follow through for the rest of the week. You can see the volatility results and comparisons in our indicator snapshot (below).

Noteworthy and Fun

Check out Jason Zweig’s classic article, Super Bowl Indicator: The Secret History. Did you know that it began as a “satire on the fallibility of human statistical reasoning?” The inventor could not believe that it had been taken seriously, and tried to kill it in this letter. When the indicator went 11 for 11 before failing, he reports, “I did what any good statistician does: I broadened my statistical base until I got the numbers I wanted.”

According to the indicator, investors should be cheering for the Rams. I am still smarting from the injustice of the Saints’ loss. Mrs. OldProf will watch of course, despite the absence of her favorite team. She is skeptical that Michigan man Brady can do it once again.

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. This week’s update shows all three time frames at close to neutral. NDD warns that the government shutdown is a big factor, so we really need a few more weeks of data before drawing important conclusions.

The Good

  • The FOMC rate decision basically underscored recent statements from Fed members, but the reassurance led to a market celebration. The Fed will be patient in waiting for actual signs of inflation and flexible in the pace of balance sheet reaction. The Fed and the markets disagree over the strength of the economy and the significance of the continuing size of the balance sheet, but for now the Fed is in “calming” mode. Ace Fed watcher Prof. Tim Duy has a complete analysis of what happened, along with his own conclusions.
  • Construction spending for November increased 0.8%, beating expectations of 0.3% and the prior month’s (upwardly revised) 0.1%.
  • University of Michigan Sentiment was 91.2, slightly beating expectations and the prior read of 90.7.
  • The ISM manufacturing index registered 56.6, beating expectations of 53.6 and a prior read of 54.3. The ISM’s own research shows that this reading, if annualized, is consistent with real GDP growth of 4%. Their report also provides interesting comments from respondents. Bespoke provides a table of the sector changes and comparison with past periods.

  • New home sales for November were 657K (SAAR) beating expectations of 555K and the (upwardly revised) prior of 562K. Calculated Risk notes that we are nearly a month behind on this data because of the shutdown. He is looking for a weaker December and a rebound in January, based on conversations with builders. John Lounsbury and Steven Hansen (GEI) emphasize the need to look past the monthly report. Their analysis takes a deep look at the data, including a rolling average of year-over-year results.
  • Employment gains for January were excellent, consistent with solid economic growth. The net gain in non-farm payroll jobs of 304K should be viewed in the context of downward revisions of 70K in the prior two months. The result is still solidly higher than expectations of a 160K gain. The highlights:

    • ADP private employment increased by 213K beating expectations of 170K. The prior month showed gains of 263K. I regard the ADP report, using different methods from the BLS, as an important source of confirmation for the “official” data.
    • The unemployment rate increased to 4% from the prior 3.9%. This reflected an increase in labor force participation.
    • Average hourly earnings increased only 0.1% versus expectations of 0.2% and a prior increase of 0.4%. This still represents a year-over-year increase of 3%, for the sixth straight month.
    • Part-time Employment makes up a lower share of total private employment. (Scott Grannis).
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