The Week Ahead: Has The Rotation From Bonds To Stocks Begun?

The Ugly

The political sideshow. There were polls to determine the “winner” of the debate. Not so long ago debates were seen as a way for the trailing candidate to show equality of stature – same stage, same rules, etc. Many challengers have used this effectively. It is also a way to demonstrate that a “Presidential” image. If an expert from years ago, without any context, read the transcript of this “town hall forum” debate s/he would not believe it. Campaigns are ever-more focused on the undecided or uncommitted voters, especially in the key states. Suppose for a moment that these voters may not have been the ones sitting at the front of the class. What do we expect the campaigns to do? The sound bite negative ads are one approach, but this is reaching a whole new level – and not a high one.

The most important thing you can do as an investor is to vote your conscience while still using sound, unemotional judgement concerning your personal finances.

The Silver Bullet

I occasionally give the Silver Bullet award to someone who takes up an unpopular or thankless cause, doing the real work to demonstrate the facts. No award this week. Nominations welcome. I also note that Dr. Ed Yardeni joined us in applauding the Justin Lahart article on CAPE. Dr. Ed provides his own thoughts about market valuation and the advantages of forward earnings.

I am not a fan of valuation measures based on trailing earnings, especially if they trail over the past 10 years. I believe that the stock market is forward looking and discounts analysts’ consensus expectations for earnings over the year ahead. More specifically, I use S&P 500 12-month forward consensus expected operating earnings, which is a time-weighted average of analysts’ expectations for the current year and the coming one.

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. You can make your own predictions in the comments.

The Calendar

We have a fairly big week for economic data, as well as earnings reports. I watch everything on the calendar, so you do not need to! Check out WTWA to focus on what is really important – and ignore the noise.

The “A” List

• Housing starts and building permits (W). Important forward looking data on a crucial sector.
• Industrial production (M). Volatile September data. Any sign of a rebound from last month’s loss?
• Fed Beige Book (W). Prepared for the next FOMC meeting, this provides color from each Fed district, going beyond the data.
• Leading indicators (Th). Widely followed, despite some controversy. Rebound expected from last month’s negative reading.
• Initial claims (Th). The best concurrent indicator for employment trends.

The “B” List

• Existing home sales (Th). Without the impact of new homes, but still a good read on the overall housing market.
• CPI (T). Inflation is still not very important, and it will not be until there are a few higher months.
• Philly Fed (Th). Has earned some respect as one of the few regional indicators that can move markets. The first October data.
• Crude inventories (W). Often has a significant impact on oil markets, a focal point for traders of everything.

More important than the economic data will be continuing earnings news.

The Presidential campaign and the final debate continue to dominate the news. The regular economic data this week include important leading indicators about housing. These will not get the attention deserved. Corporate earnings reports will also get some attention, but the emphasis seems to be on spectacular “misses.” Did you even realize that the earnings season is positive so far? Unless you look at the FactSet data, you would not know.

Through this haze there have been a few glimmers of a new trend. If you are alert, you will see more attention to the question:

Has a market rotation begun?

There is some evidence.

• The 10-year note has moved noticeably higher while the yield curve has steepened.
• Utilities are losing ground while banks are gaining. Brian Gilmartin astutely asks, whether banks are assuming that role.
• Economic skepticism remains intense – but perhaps the result of the election. Chris Matthews (Fortune ) notes that concern about the economy has grown even as data show improvement.

  …a voter’s political beliefs and the overall political environment instead drives how they feel about their economic circumstances.

  There’s no better way to interpret the latest results from the latest Marketplace-Edison Research Poll, which showed that 30% percent of Americans are very fearful they will lose their job in the next six months, up 10% from last year.

And also….

A particularly telling figure in this year’s survey: While 37% of those surveyed said their personal economic situation has improved over the past year—versus 21.5% who said it got worse—just 30.3% said the overall economy improved. What’s more, 36.9% said it got worse.

If more people’s financial situation improved than deteriorated, why do more people think it’s the opposite for the economy in general?

As always, I’ll have a few ideas of my own in the conclusion.

We follow some regular great sources and also the best insights from each week.

Risk Analysis

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