Finally, a bit of rationality in the stock markets! Thoughts and Commentary…… September 13, 2015

Finally, a bit of rationality in the stock markets! Thoughts and Commentary…… September 13, 2015

The DJIA ended this week at 16,433, climbing 2% from last week’s close of 16,102. This was the best week since March.

As you can see from the chart below, it traded within a reasonable range without the chaos that was apparent in the prior weeks. (Pundits have been blaming the lack of chaos on “traders waiting for news from the Fed”.)

For perspective, please see a chart below of the S&P 500 Daily chart through 9/11/15 over the past year. Note the severe pull back last Oct/Nov and the subsequent rebound followed by new all-time highs…..

The yield on the 10 year Treasury Note increased from 2.13% to 2.19%, reflecting some economic news that indicated positive signs in the US economy’s growth and stability. Though it has declined from the recent high it hit on Wednesday to Friday’s close.

Since the worst of the market chaos on August 25 and 26 when Gold hit a high since July, Gold has resumed what appears to be a consistent slide:

Though there was a decent amount of news and noise surrounding oil inventories, supplies and rigs, oil did remain within a reasonable trading range:

Natural gas – here are two charts, one short term, one longer term:

Source for all charts above: http://www.marketwatch.com/

Let’s look at some of the economic news of the past week:

Small Business Optimism: Gained 0.5 to 95.9, with 5 components increasing, 3 declining and 2 flat during August. From the report: “Small business owners did not seem to be very concerned about the antics of the stock market or China’s currency devaluation. Maybe it was too late in the month to be fully captured by the survey so more might be revealed in September, but most small business owners have their capital primarily invested in their own firm, not other people’s firms.“ The components that declined were “expects economy to improve”, “expected credit conditions”, and “now a good time to expand”. http://www.nfib.com/surveys/small-business-economic-trends/ (Overall okay news for the economy.)

Gallup US Consumer Spending: For August fell to 89 from July’s 91. Had been in the 90-91 range since April. Note, this excludes purchases of homes, cars and regular household expenses, and is “self-reported”. http://www.gallup.com/poll/151151/consumer-spending-monthly.aspx (Supports keeping rates where they are.)

Consumer Credit: Increased by $19.1 B in July, above the $18B consensus, increasing by 6.7% y/y. Indicates that consumers are willing to borrow to buy goods. http://www.federalreserve.gov/releases/g19/current/ (The Fed can use this as reason to tighten/raise rates.)

Labor Department’s Job Openings and Labor Turnover Survey: Job openings was reported at 5.753M for July, up from an upward revised June of 5.323M. The actual number of hires went down from June’s reading of 5.182M to 4.983 in July. Business services, hospitality and retail led the Openings growth. http://www.bls.gov/jlt/news.htm (The Fed can use this to cite labor market tightness.)

New Jobless Claims came down by 6K from the prior week, though the 4 week average has moved higher by a bit. http://www.dol.gov/ui/data.pdf (The four week average can be used by the Fed as reason to hold or raise.)

Import and Export Prices: Export prices for both M/M and Y/Y are down, -1.4% and 7%, respectively. Import prices are also down -1.8% and -11.4% for M/M and Y/Y, respectively. http://www.bls.gov/news.release/ximpim.nr0.htm

As this definitely demonstrates the risk of deflation, the Fed can point to this as a reason to leave rates alone for the moment.

As an aside, lower cost goods, especially energy, works as like a tax cut in stimulating the economy. We are not seeing signs of such “stimulation”.

Bloomberg’s Consumer Comfort Index was flat for the week of 9/6 from the prior week, indicating a stability of consumer opinions in the face of stock market volatility. http://www.bloomberg.com/news/articles/2015-09-10/consumer-comfort-stalls-as-americans-see-mixed-economic-picture

Producer Price Index: The unadjusted total index for August was flat M/M and down 0.8% Y/Y. The unadjusted index excluding energy and food was up 0.3% M/M, which the Fed can look to as an indication of potential inflation. Y/Y this index was up 0.9%, still very low and below Fed targets. http://www.bls.gov/news.release/ppi.t01.htm

Consumer Sentiment: For mid-month September, this number was down much more than expected to 85.7 versus consensus of 91.0 and prior reading of 91.9. This is the lowest reading in the past 12 months. “Expectations” and “current conditions” both showed declined optimism. Though it was down 6.7% M/M, the Y/Y showed an increase of 1.3%. http://www.sca.isr.umich.edu/ This definitely supports the argument to leave rates alone, for the Fed.

FactSet Metrics:

• “Of the 496 companies that have reported earnings to date for Q2 2015, 74% have reported earnings above the mean estimate and 50% have reported sales above the mean estimate.”

• ”For Q3 2015, the estimated earnings decline is -4.4%. If the index reports a decline in earnings for Q3, it will mark the first back-to-back quarters of earnings declines since 2009.”

• “The percentage of companies issuing negative EPS guidance [for 3rd Q 2015] is 71% (76 out of 107), which is slightly above the 5-year average of 70%.”

http://www.factset.com/websitefiles/PDFs/earningsinsight/earningsinsight_9.11.15 The weakness in projected earnings would support the Fed keeping rates where they are at, the “Doves” would say.

Conclusion and Thoughts:

All eyes will be on the Fed this week. Their two day meeting will end on Thursday, and we will hear their thoughts at the end of their meeting. Ideally, we will see limited volatility at least through the last hours of their meeting! Our bias is that they will not raise rates, and if this is the case, then we may see a nice rally as a result of the deferral.

As you can see from the above facts and thoughts, there are lots of mixed results. At the same time, the US economy definitely is sound and is not showing any effects of trauma from the volatility in China and the late August US volatility. We remain very confident that the US economy will continue to move forward in a solid and consistent manner.

We are monitoring news flows for word of contract cancellations or changes in growth trajectories due to the late August volatility, though we have not seen any changes to note.

The persistent weakness in energy prices definitely is an issue for the oil and gas industry and its suppliers, in the short term, though valuations at this point are tremendously compelling and discount future increases in commodity pricing.

Please reach out regarding any questions you may have.

We wish you another great week!