After last week’s avalanche of economic data, the calendar is back to normal. More important is the onset of earnings season. Recent data have reassured many observers about the health of the U.S. economy. The period of seasonal weakness is ending. Expect people to be asking:
Can this earnings season lead to a big year-end rally?
Last Week Recap
My expectation for last week concerned the relationship between economic and stock market strength. That discussion might come another day, but last week’s attention was focused on Las Vegas.
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 gain of 1.18% on the week, as well as other key comparisons. Once again, it was a week of very low volatility.
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.
Personal Note
Next week I am off for a weekend jaunt to celebrate Mrs. OldProf’s birthday. I’ll try to post an indicator update, and maybe a bit more.
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!
The economic news remained quite positive. New Deal Democrat’s weekly update of high frequency indicators shows what is going on in various lead times. “The last few months have been boringly consistent, but in a good way!”
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Employment news was bad, at least in terms of the headline numbers. Hurricane effects are important to consider and defy accurate adjustments. I will include each of the key points in this section, positive, negative, and adjustments.
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ADP private employment grew only 135K, down from last month’s 228K and missing expectations for 160K.
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Initial jobless claims continue lower, now at 260K. While not at the levels from earlier in 2017, the hurricane effects clearly impacted this series.
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Headline payroll jobs declined by 33K and prior months were revised a bit lower. Unemployment declined to 4.2% and job gains from the household survey were 906K
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Hourly wages improved, but the change might well result from the compositional effects of the weather – a greater effect on lower-paid workers. (Dean Baker). His analysis wisely concludes that this report needs some context from the October data.
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Labor force participation is improving
(WSJ)
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Adjustments Bob Dieli provides more insight into the numbers with a helpful approach you will not see elsewhere.
The Ugly
People want and deserve to know what is happening. They want details and understanding – in part to gauge the level of personal risk. If a desire for fame is the (apparently inexplicable) motive for random acts of mass violence, there is no real solution.
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 normal week for economic data, featuring retail sales and the release of the FOMC minutes on Wednesday. Inflation data are still not very important, but that may change soon. There is plenty of FedSpeak on tap for those who can never get enough of such commentary!
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
After last week’s avalanche of economic data, it is time for earnings season. It is too soon to expect any serious news on tax cuts. The period of seasonal weakness is ending. The market has shown strength during recent earnings seasons. Economic news has been solid.
Expect the punditry to be asking:
Can this earnings season spark a big year-end rally?
You might think that publication of actual audited reports about company performance would provide a solid, uncontroversial source of data. You would be wrong!
Earnings can be measured in different ways and interpreted in many others. Even when companies are beating pre-season expectations, the debate rages. Here are popular viewpoints. You will see them all in the next month.
- Operating earnings are deceptive. Those “one time” charges have a way of adding up.
- Analyst expectations are always wildly optimistic.
- Expectations set a low bar for earnings announcements. (Inconsistent with the “wildly optimistic” viewpoint, but often voiced by the same people. Factset notes that the typical “underbid” is 4.2%. That would imply an earnings season growth of 6%.
What to watch for
- The dollar. FactSet’s excellent Earnings Insight shows the effect on Q3 earnings.
- FactSet also notes the drag from insurance, probably a one-time effect.
- And what to expect about the dollar? Bespoke notes the recent rebound. See also “Davidson” via Todd Sullivan.
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 to show the chart with the business cycle indicator.
Doug Short: Regular updating of an array of indicators. Great charts and analysis. With Friday’s employment report in the books, it is time for an update of the Big Four economic indicators.
The start of a recession (better called a business-cycle peak as Bob Dieli wisely reminds us) requires two elements. The key series must roll over from a peak and then exhibit a significant decline. Put another way, if current levels later prove to represent the peak of the current economic cycle, the NBER will later date this as the recession beginning. This is merely a reminder of how to use the Big Four, not something that we should currently expect.
Insight for Traders
We have not quit our discussion of trading ideas. The weekly Stock Exchange column is bigger and better than ever. We combine links to trading articles, topical themes, and ideas from our trading models. This week’s post analyzed methods of stock-picking. Blue Harbinger has taken the lead role on this post, using information from me and from the models. He is doing a great job.
Insight for Investors
Investors should have a long-term horizon. They can often exploit trading volatility!
