Are Investors Bullish? and Others News

It is a big week for economic data. The punditry will be analyzing the Trump tax proposal. Everyone will be drawing conclusions about how these factors may be linked with stock prices. Expect people to be asking:

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Does economic strength equal stock market strength?

My expectation for last week was right on target. Attention rapidly turned to the Trump tax proposal. More on that in today’s Final Thoughts.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short via Jill Mislinski. She notes the weekly gain of 0.68%. While the range was slightly higher than last week, it was still less than 1.5% on an intra-day basis.

Doug has a special knack for pulling together all the relevant information. His charts save more than a thousand words! Read the entire post for several more charts providing long-term perspective, including the size and frequency of drawdowns.

As I indicated recently I am moving the Silver Bullet award to a standalone feature, rather than an item in WTWA. I hope that readers and past winners, listed here, will help me in giving special recognition to those who help to keep data honest. As always, nominations are welcome!

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!

The economic news remained quite positive.

The Good

  • Q2 GDP registered a revised gain of 3.1%. This is backward looking, but an improved base for the rest of the year. The third quarter does not look as promising. Jill Mislinski’s “inside the GDP” story is a great look at the impact of individual GDP components.

  • North Korea and the US are in direct contact (BBC). The back-channel discussions will probably be more fruitful than the contact via tweets.
  • Serious mortgage delinquencies declined again. Fannie Mae (via Calculated Risk) notes that the level is at its lowest since November, 2007.
  • Jobless claims “defy nature” reports Bespoke. Their well-designed chart illustrates the point. New Deal Democrat’s “weather adjusted” calculation puts initial claims at 237K.

  • New home prices have moved higher because builders’ need to compete with distressed sales has declined. (Calculated Risk).

 

The Bad

  • Aid to Puerto Rico

    delayed and inadequate, adding to a “humanitarian crisis”. House Speaker Paul Ryan, but see above).
  • Pending home sales decreased 2.6%, significantly missing expectations of a 0.5% decline. Calculated Risk discusses, including the hurricane effects.
  • Rail traffic remains weak via Steven Hansen’s (GEI) focused approach on the important components. He also notes the Harvey and Irma effects.
  • Consumer confidence declined slightly, missing expectations. Both the Conference Board and Michigan measures remain at very high historical levels. Jill Mislinski’s Doug Short chart (GEI) pulls all of the information together in a single look. Read the entire post for more charts, including the Michigan version.

  • New home sales declined to a 560K annual rate (Calculated Risk). This missed expectations of 583K. New Deal Democrat sees a disappointment, even after a hurricane adjustment.
  • Personal income grew by only 0.2% and spending by 0.1%. These results were in line with expectations, but the decline is still a disappointment. (Calculated Risk).

The Ugly

Puerto Rico after-effects. The needed infrastructure rebuild is massive. And do you know the largest element of the Puerto Rican economy? If you said “pharmaceuticals” you beat me. Plenty of drug production is affected.

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.

The Calendar

We have plenty of economic releases on the schedule, including the most important. The ISM indexes and auto sales are noteworthy, but the data on employment will take center stage. Fed participants will be in abundance. And of course, there might be an important tweet.

Briefing.com has a good U.S. economic calendar for the week (and many other good features which I monitor each day). Here are the main U.S. releases.

Next Week’s Theme

The avalanche of economic data, right before earnings season, could refocus attention from politics to economic fundamentals. The two are related, of course. The state of the economy and employment is the backdrop for the debate on tax policy changes – not to mention political credit-claiming!

Expect the punditry to be asking:

Does economic strength imply stock market strength?

It is popular to note that the economy does not equal the stock market, that stock trading is not the same as GDP futures, etc. That said, the reasons for market strength or weakness are a continuing topic of interest. Here are some common claims about the extended market rally.

  • It is crazy! Valuations are sky high according to CAPE and other measures.
  • Asset prices are higher only because of the Fed – maybe with an assist from other central banks.
  • A recession is imminent. (Some debunking from HORAN).
  • It seems OK for the moment, but expect a major correction in the near future.
  • Complacent investors are ill-prepared for a decline. Suzanne Woolley (Bloomberg) offers an alternative viewpoint. See also the sentiment chart above.
  • Stock gains depend upon expectations of policy changes – Trump-designed or otherwise.
  • Stock prices have followed the increase in earnings expectations. (Eddy Elfenbein sees a good earnings season ahead).
  • Stock prices do not track the economy on a short-term basis, but long-term expectations are crucial. (Brian Gilmartin).

As usual, I’ll have more in the Final Thought, where I always emphasize my own conclusions.

Quant Corner

We follow some regular featured sources and the best other quant news from the week.

Risk Analysis

I have a rule for my investment clients. Think first about your risk. Only then should you consider possible rewards. I monitor many quantitative reports and highlight the best methods in this weekly update.

The Indicator Snapshot


 

The Featured Sources:

 

Bob Dieli: Business cycle analysis via the “C Score.

RecessionAlert: Strong quantitative indicators for both economic and market analysis.

Brian Gilmartin: All things earnings, for the overall market as well as many individual companies.

Georg Vrba: Business cycle indicator and market timing tools. It is a good time

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