This was a light economic news week for the U.S. economy. The most important news came from the Conference Board, which released the latest LEI and CEI numbers on Thursday. On Wednesday, The Census Bureau released building permits and housing starts data. The markets saw modest advances on the back of solid earnings reports. Overall, the adjectives “modest” and “moderate” continue to best describe the economy and markets.
On Thursday, the conference board released the latest leading and coincident economic indicators. LEIs increased 0.6%; CEIs were up 0.2%. Nine of 10 leading indicators increased; the number also received a solid boost from the three industrial activity indicators. All four coincident indicators rose. The combined reading of both points to continued modest growth. However, there is an interesting split occurring in the six-month rolling averages for both:
The six-month rolling average for the leading indicators has been above 2% for the last six months, while the same reading for the coincident indicators has fluctuated around 1%. It’s reasonable to expect the size of the leading numbers to eventually show up in the coincident numbers, pulling them to higher levels. But that hasn’t happened. Instead, the coincident numbers continue pointing to modest but consistent growth.
On Wednesday, the Census Bureau released the latest housing starts and building permits data. Permits increased 7.4% M/M and 5.1% Y/Y, while starts rose 8.3% M/M and 2.1% Y/Y. Looking at the longer-trend data, the housing market appears to be expanding at a stable rate. Let’s start by looking at building permits:
The top chart shows total permits for the last 10 years. This number has been increasing between 1.1 million and 1.3 million for the last two years. The bottom chart breaks that number down into 1-unit, 2-4 unit and 5+ unit numbers. 1-unit permits (blue, left scale) are in a gentle uptrend. The other two subsectors are moving sideways.
The following two charts show housing starts:
The top chart shows total starts, which have been expanding between 1.1 million and 1.3 million for the last 1 ½ years. The bottom chart breaks the data down into 1-unit, 2-4 units, and 5+ unit structures. As with the building permit data, 1-unit structures are growing modestly, while the other two sectors are expanding at steady rates.
Like all economic data points, the market overreacts to each new housing report. But what are really matters is the long-term trend, and that shows a key sector of the economy that is expanding at moderate yet consistent rates.
Market overview: As they have been for the last two years, I remained skeptical of the market’s ability to make a strong advance. The market remains expensive: the current P/E ratio of the Nasdaq and S&P 500 26.37 and 24.35, respectively. Even the forward numbers are high. And while earnings have been good so far – Zack’s research is projecting top line revenue growth of 5.5% for the S&P 500 – it would take far larger percentage increases in both corporate earnings and overall economic growth to spur the market significantly higher. At these high valuation levels, it’s far more reasonable to assume will see the markets grind higher point by point.
This week, there is an interesting split in the performance of various sectors:
The long end of the Treasury curve rallied strongly, as did Nasdaq. But other indexes – mid-caps, small-caps and the S&P 500 – were up only modestly. Overall sector performance was also more defensive than the week’s news reports would suggest:
While news stories highlighted the strong rally in the Technology sector, Utilities were the clear winners, increasing 2.64% to the XLK’s 1.07%. And the longer-term rotation graph shows an even weaker picture:
Basic materials, Industrials, and Health Care are the only sectors leading the market. Over a 10-week time horizon, Consumer Discretionary, Utilities, and Technology are all moving lower.
Ultimately, we remain where we’ve been for the last few years: an expensive market that needs additional fuel to move higher.
Hale Stewart, XE.com