My expectation that last week would focus on the state of the economic policy agenda was pretty accurate. While the overall weekly change in the market was modest, the moves came from an evaluation of the agenda potential. Monday saw an expectation of more Congressional cooperation. Tuesday night’s campaign-style speech brought fears of a government shutdown. The economic announcements, while pretty good, seemed to have little effect on trading.
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 overall weekly gain of 0.73% as well as the relationship to the record close and the daily action. The only thing missing? Highlights noting the tweet of the day!
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 last week was generally positive. Even those that missed expectations were not too bad.
The Good
- Initial jobless claims remain low. Bespoke notes that anything below 300K used to be regarded as very good. Now, they say, 250K is the new 300K.
- Railroad traffic has improved on key metrics. Steven Hansen (GEI) provides his customary thorough look. He also analyzes the improvement in truck traffic, describing and comparing several competing indicators. Check out his reasons for preferring the CASS index, including the consistency with sector employment.
- Chemical activity barometer shows continued strength. “Davidson” (via Todd Sullivan) follows this closely, showing the relationship with other important indicators. This chart shows why understanding the economy is critical to understanding stock prices, but the full article is well worth a read.
- Sentiment has turned more bearish (a contrary indicator). Charts and analysis from David Templeton at HORAN.
- The serious mortgage delinquency rate remains low, close to long-term normal levels at 0.85%. (Calculated Risk). Foreclosure inventory is below 400,000 for the first time since 2007.
- The earnings picture remains strong. Dr. Ed Yardeni’s recent post confirms Brian Gilmartin’s analysis, frequently reported here. Yardeni writes:
- S&P 500 forward revenues per share, which tends to be a weekly coincident indicator of actual earnings, continued its linear ascent into record-high territory through the week of August 10.
- S&P 500 forward operating earnings per share, which works well as a 52-week leading indicator of four-quarter-trailing operating earnings, has gone vertical since March 2016. It works great during economic expansions, but terribly during recessions. If there is no recession in sight, then the prediction of this indicator is that four-quarter-trailing earnings per share is heading from $126 currently (through Q2) to $140 over the next four quarters.
The Bad
- New home sales declined to a SAAR of 571K, missing expectations of 615K and down from 630K in June. New Deal Democrat views this as part of a larger decline – no high in the 3-month moving average since March. Calculated Risk notes the large increase in values for the prior three months and calls this a “decent report.”
- Durable goods declined dramatically over the prior month, down 6.8% instead of up 6.4%. The series is less volatile when you look at the ex-transportation value. That was an increase of 0.5%, in line with expectations. As Fortune explains, the big change was due to Boeing effects. Here is the history ex-aircraft.
- Existing home sales recorded a SAAR of 5.44M, a decline from 5.51 million. This also missed expectations by the same margin. Analysts site low inventory levels as the biggest factor in slow sales. Calculated Risk has a first-rate explanation of the linkage between new and existing sales. One needs to understand the effect of foreclosures, the rate and price of new construction, and the relationship for the existing sale market. The easiest way to see this is this chart, where Bill expects a gradual reduction to long-term levels. It has been a slow and gradual process.
The Ugly
Traffickers using Facebook video of torture to extort ransoms from migrant families. The Sunday Times (London).
And an update on the shoddy care within “five-star” addiction centers. (Stat)
A two-part question that is enjoyable and revealing (no peeking). First, what are three technology companies in terms of revenue per employee. Not earnings, revenue). Second, what is this level? Mrs. OldProf nailed two of the top three, but even she missed on the level of revenue per employee. This is not a metric most people think about. How did you do?
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 a jam-packed economic calendar, probably the biggest of the year. Personal income and spending, auto sales, and consumer confidence readings are all important. The employment report claims the spotlight on Friday, with the ADP private employment change announced Wednesday.
President Trump is expected to visit Texas, and also to kick off his campaign for tax reform with a trip to Missouri.
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
Unlike the last few weeks we have a cornucopia of new information and also a symbolic focal point. With Congressional representatives still in their home districts, and the President pushing for tax reform, we have a natural preamble to Labor Day. Expect a week where everyone will be wondering:
What can be done to create more jobs with better pay?
Friday morning’s data will be the climax. And then…. most will take off for a long weekend.
The questions around employment have many important dimensions. It is fertile ground for debate and interpretation. The policy choices rest upon core values, one’s estimation of the current economy, and the analysis of each change. I have tried to lay out some key issues and viewpoints, but it is certainly not a comprehensive list.
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