Jeff Miller | Jun 29, 2014 03:06AM ET
With the stunning decline in Q1 GDP, the health of the US economy has once again taken center stage. The week ahead is shortened by a Friday holiday, but is packed with important data releases. It will all be over Thursday morning, when many will quit early and head for the beach.
In a quiet, low volume trading environment, we could see some early fireworks...
h2 Prior Theme Recap/h2Last week I expected plenty of inflation talk leading up to the release of the Fed’s preferred measure, the PCE index. That assessment was accurate. I also speculated that there might be a final GDP revision exceeding 2%. That was an underbid! The story made plenty of news, but caused only a temporary reaction in stocks. Bonds strengthened (lower yield) emphasizing the continuing disparity between those markets.
Naturally 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. That is the purpose of considering possible themes for the week ahead.
h3 This Week’s Theme/h3With the Q1 '14 GDP decline as context, the economic debate is once again wide open. It is time for a mid-year reality check, with possible fireworks in store. I expect the media and punditry to examine a full range of economic possibilities. Here are the candidates.
Same data, many interpretations. Some positions reflect underlying policy and political preferences. Investors must use care, especially on issues of this type. We must not confuse what we hope for with reality and sound investments.
Which of these viewpoints is correct? As usual, I have some thoughts that I will share in the conclusion. First, let us do our regular update of the last week’s news and data. Readers, especially those new to this series, will benefit from reading the background information .
h3 Last Week’s Data/h3Each week I break down events into good and bad. Often there is “ugly” and on rare occasion something really good. My working definition of “good” has two components:
The Good
There was some encouraging news last week.
As I have often observed in the past, corporations have an incentive to borrow in the bond market and use the proceeds to buy back shares when their earnings yield exceeds the corporate bond yield. That’s been the case since 2004 thanks to the Fed’s easy monetary policies under both Alan Greenspan and Ben Bernanke, and now Janet Yellen.
Buybacks are a form of financial engineering since they boost earnings per share whether a company’s fundamentals are improving or not. They’ve certainly contributed to the bull market’s great run in an economic environment that has been widely described as “subpar.”
The Bad
The economic news included some negatives as well.
The Ugly
Ukraine. The ceasefire in eastern Ukraine is “under stress.” (Via BBC ).
h3 The Silver Bullet /h3I occasionally give the Silver Bullet award to someone who takes up an unpopular or thankless cause, doing the real work to demonstrate the facts. Think of The Lone Ranger.
Normally the award goes for a single refutation of a single bad claim. Barry Ritholtz often uses a weapon that is both more modern and more powerful than the Lone Ranger’s. Please read his general failure in causal reasoning. Here are some recent examples, cut down with a Gatling gun instead of a six-shooter.
What are a few examples of the single factors that have been making the rounds these days?
GDP: “We have never had a negative 2.96 percent GDP report and not gone into recession…”
Rising Rates: “The U.S. stock market doesn’t do well when interest rates are rising.”
Earnings Surprises: “Earnings are good this quarter, better than expected, and therefore, the market’s going higher.”
New Financial Products: “These new products are being adopted, therefore it means the bull market is coming to its peak.”
h3 Quant Corner/h3Death Cross/Golden Cross: “When the 50 and 200 day moving average cross to the upside (downside), it bodes well (poorly) for any trading vehicle.”
Whether a trader or an investor, you need to understand risk. I monitor many quantitative reports and highlight the best methods in this weekly update. For more information on each source, check here .
Recent Expert Commentary on Recession Odds and Market Trends
RecessionAlert : A variety of strong quantitative indicators for both economic and market analysis.
Bob Dieli does a monthly update (subscription required) after the employment report and also a monthly overview analysis. He follows many concurrent indicators to supplement our featured “C Score.” One of his conclusions is whether a month is “recession eligible.” His analysis shows that none of the next nine months could qualify. I respect this because Bob (whose career has been with banks and private clients) has been far more accurate than the high-profile TV pundits.
unveiled a new system .
Doug Short : An update of the regular ECRI analysis with a good history, commentary, detailed analysis and charts. If you are still listening to the ECRI (2 ½ years after their recession call), you should be reading this carefully. Doug includes the most recent ECRI discussion, which has been consistently bearish, including the blown call on the recession.
Doug also continually updates the “Big Four” indicators used in recession dating by the National Bureau of Economic Research (NBER). With all of the data for May in the books, it is time for another look at the key chart, but see the full article for comprehensive discussion.
Another great source is @MarathonWealth ). This is a wonderful interactive tool. The Lauren Nassef illustration captures the concept.
We have plenty of news in a holiday-shortened week.
The “A List” includes the following:
The “B List” includes the following:
Despite the start of summer, the speaking calendar includes SF Fed President on Tuesday and Chair Yellen on Wednesday.
While the financial markets have adjusted to the current Iraq story (see here for confirmation), there is plenty of attention to any breaking news. There is also the possibility of increased conflict in Ukraine.
How to Use the Weekly Data Updates
In the WTWA series I try to share what I am thinking as I prepare for the coming week. I write each post as if I were speaking directly to one of my clients. Each client is different, so I have five different programs ranging from very conservative bond ladders to very aggressive trading programs. It is not a “one size fits all” approach.
To get the maximum benefit from my updates you need to have a self-assessment of your objectives. Are you most interested in preserving wealth? Or like most of us, do you still need to create wealth? How much risk is right for your temperament and circumstances?
My weekly insights often suggest a different course of action depending upon your objectives and time frames. They also accurately describe what I am doing in the programs I manage.
h3 Insight for Traders /h3Felix remains cautiously bullish. The positive elements are modest in strength and uncertainty remains high – typical for a trading range market. This week we were fully invested in three of the top sectors for our trading accounts. That remains our position going into the week ahead, although some of the strength is outside of the US.
You can sign up for Felix’s weekly ratings updates via email to etf at newarc dot com.
h3 Insight for Investors /h3I review the themes here each week and refresh when needed. For investors, as we would expect, the key ideas may stay on the list longer than the updates for traders. The current “actionable investment advice” is summarized here .
The market still did not provide much opportunity for fresh buys. The gentle upward action is fine for long-term investors and excellent for those trying out our Enhanced Yield approach.
Here are some key themes and the best investment posts we saw last week:
Often the best advice helps the investor learn what to ignore.
QE has not just propped up asset prices, it has also helped to stabilize economies and corporate profits. As long as the eventual withdrawal of QE coincides with continued fundamental stability, then there may be less of an increase in market volatility than many fear.
On the positive side, there are some good stock ideas.
Goldman Sachs shares some stock choices (via Steven Russolillo at MarketWatch for the underlying rationale). Skeptics may ask why they would share ideas, but that is the modern method of the big firms. They need to show a little. We own some of the names and others are on our watch lists for various programs, so the ideas are interesting.
If you are worried about possible market declines, you have plenty of company. It is possible to get reasonable returns while controlling risk. Check out our recent recommendations in our new investor resource page — a starting point for the long-term investor. (Comments and suggestions welcome. I am trying to be helpful and I love and use feedback).
h3 Final Thought/h3The weakness in Q1 GDP is not consistent with the wide range of economic data that we track. There is no indication of a recession using the indicators tracked by the NBER, even during the first quarter. Growth has been sluggish, but steady. This feels like a recession to most average people, who consistently respond to surveys that the Great Recession has not ended.
Meanwhile, the business cycle hit a trough in 2009 and shows no sign of reaching a peak. Michigan economist Justin Wolfers, writing in the New York Times, observes as follows :
The most important indicators of our economic health are telling very different stories. On Wednesday, news reports made much of the fact that gross domestic product fell at an annual rate of 2.9 percent in the first quarter of this year, a decline largely attributable to bad weather. That brings growth over the past year to a disappointing 1.5 percent. Yet the labor market continues to deliver good news, and over the same period, the unemployment rate fell by more than a full percentage point.
He notes that the past year has defied the relationship between unemployment and economic growth, Okun’s Law. The chart below shows that current results represent a dramatic outlier.
I do not expect any instant economic solutions, but the evidence supports continued reversion to the long-term growth trend. This will continue until we see more signs of a tight labor market — not just more jobs, but more hours and higher wages.
That is why the data this week are especially important. Any break from the recent trend of modest growth could lead to some early holiday fireworks.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.