The winter storm that recently tore across the northeastern United States will, no doubt, take the blame for the continuing weak economic news and data that have been coming out of Wall Street. Having been the economic scapegoat since December, there’s no reason to change tactics.
But the raft of ongoing disappointing economic news and data suggests there’s more to the nation’s weak economic news than cold weather. After all, it’s not as if the U.S. economy had been red-hot and then suddenly hit a brick wall in December. If there’s one thing the U.S. economy has been—it’s consistently weak.
For example, while the S&P 500 and other stock indices have been enjoying prolonged bull runs, the U.S. economy has been stalling. Since the magical bull market began in 2008, the U.S. unemployment numbers have remained stubbornly high and the underemployment numbers eye-wateringly high. At the same time, wages are stagnant and, not surprisingly, retail sales have disappointed. More and more Americans are saddled with out-of-control debt and a record 20% of American households (one in five) were on food stamps in 2013.
Speaking of 2013, while the S&P 500 notched up a 30% annual gain, each quarter, an increasingly larger percentage of companies revised their earnings guidance lower. Saving the best for last, during the fourth quarter of 2013, a record 88% of S&P 500 companies that provided preannouncements issued negative earnings guidance.
But 2014 didn’t start out that well, either. For the first quarter of 2014 so far, 80% of the S&P 500 companies that have issued guidance revised their earnings lower; this compares to the 78% of … Read More
There’s a significant amount of pessimism towards the Chinese economy these days, and the reasons behind this are very understandable. The economic data suggests the country is headed toward an economic slowdown.
In 2013, China’s gross domestic product (GDP) grew by 7.7%—barely better than the previous year and the estimates that were calling for the lowest growth rate since 1999. (Source: Yao, K. and Wang, A., “China’s 2013 economic growth dodges 14-year low but further slowing seen,” Reuters, January 20, 2014.) Keep in mind that despite beating the estimates, this GDP growth rate is much lower than the country’s historical average.
This isn’t all. A credit crunch is also in the making. We are now hearing how companies in China will have troubles paying their interest on the bonds they have issued. So far, we have seen one default on payment by Shanghai Chaori Solar Energy Science & Technology Co. This solar company, based in China, defaulted on a $14.7-million interest payment on bonds it issued two years ago. (Source: Wei, L., McMahon, D. and Ma, W., “Chinese Firm’s Bond Default May Not Be the Last,” The Wall Street Journal, March 9, 2014.)
Before this default, there was a slight hope that the government would come in and bail out the troubled companies—something that happened in the U.S. economy during the financial crisis in 2008. Now, with this default, there are speculations that we will see more of the same.
Furthermore, there are concerns that property values in the Chinese economy are going to see a correction. Over the past few years, there has been the mass development of ghost … Read More
Two things have been consistent this winter: bad weather and bad economic news. And both just keep on rolling. With spring just around the corner, the weather will clear up; the U.S. economic news, on the other hand, might not be so lucky.
Over the course of the last week or so, a raft of weak economic news and earnings has welcomed the markets.
For starters, a higher number of Americans filed applications for unemployment benefits for the week ended February 8. Jobless claims climbed by 8,000 to 339,000; the four-week moving average for new claims increased to 336,750 from 333,250.
For the week ended February 15, applications improved—though barely—by 3,000 to 336,000, which was less than what was forecast. The four-week moving average (which is considered a less volatile figure), increased by 1,750 to 338,500.
And then there’s more bad economic news on the home front. Last week, the National Association of Home Builders (NAHB) said that its monthly housing sentiment index tanked from 56 in January to 46 in February, the largest monthly drop in history. The negative sentiment goes hand in hand with the two-percent drop in applications for U.S. home mortgages for the first week of February. Mortgage application activity continued its nascent drop in the second week of February, falling 4.1% to 380.9.
Further weakness is being felt in U.S. manufacturing. Economic news from both the New York and Philadelphia indices disappointed. The New York manufacturing gauge slowed in February after hitting a 20-month high in January. Manufacturing conditions slipped to 4.48 in February from 12.51 a month before. Analysts had forecast a much more … Read More
We see there’s a significant amount of economic news mounting against the argument that key stock indices will go higher this year. We see major companies on the key stock indices reporting corporate earnings that are dismal to say the very least. We see indicators of prosperity suggesting the opposite is likely going to be true for the U.S. economy. Lastly, we also see troubles developing very quickly in the global economy.
First on the line are the corporate earnings of companies on the key stock indices—which is hands down one of the main factors that drive these indices higher. We see companies showing signs of stress. Consider General Motors Company (NYSE/GM), for example; the company’s corporate earnings declined 22% in 2013 from the previous year. (Source: “GM reports lower-than-expected 4Q earnings,” Yahoo! Finance, February 6, 2014.)
Some might call this a story of the past; we need to look at what the future looks like instead. Sadly, going forward, companies on the key stock indices and analysts look worried as well. Consider this: so far, 57 S&P 500 companies have issued negative corporate earnings guidance, while only 14 have issued positive guidance. At the same time, analysts’ expectations are coming down as well. On December 31, the consensus estimate expected S&P 500 earnings to grow by 4.3%; now, these expectations have come down to 1.5%. (Source: “S&P 500 Earnings Insight,” FactSet, February 7, 2014.)
Looking at the broader U.S. economy, it’s not moving in favor of the key stock indices, either—the economic data isn’t looking very promising.
Industrial production in the U.S. economy declined in January from the previous … Read More
While most astute investors would point to a weak U.S. economy as the reason for the recent lackluster U.S. employment data, economists, in their infinite wisdom, point to Mother Nature. She seems to shoulder a lot of the economic blame in this country.
In January, the U.S. economy added just 113,000 new jobs, far fewer than the expected 180,000 jobs. Freezing winter weather is being blamed for the weak U.S. unemployment data. This is the second straight month of disappointing jobs data from the U.S. Department of Labor.
Last month, the U.S. economy added just 74,000 jobs—far, far below the forecasted 200,000 jobs. The back-to-back weak employment numbers continue to fuel fears that the so-called U.S. economic recovery might be stalling…if one could ever really say the U.S. economy took off.
The new unemployment data shows that 10.2 million Americans in the U.S. economy have work. While the number of people who have been out of work for more than 27 weeks declined by more than 200,000, the number was probably impacted by the 1.7 million Americans who lost their extended federal unemployment benefits at the end of December.
Last Thursday, attempts to revive a program aimed at extending unemployment benefits by three months for the long-term unemployed failed, being supported by just 59 of the 60 senators needed to pass the motion. At the end of the day, in this U.S. economy, 3.6 million Americans, or 35.8% of the unemployed, are stuck in long-term unemployment limbo.
And they might be stuck there for a long time. A recent experiment conducted by a visiting scholar at the Boston Fed found … Read More
Key stock indices are showing robust performance—especially following the Federal Reserve’s announcement that it will not be tapering its bond buying program at this time. The S&P 500 and Dow Jones Industrial Average reached new record highs last Wednesday; that means the U.S. economy is doing great, right? I mean, just look at the chart below; everything seems to be heading smoothly upward in what is supposed to be the most volatile month of the year, according to The Stock Trader’s Almanac. It’s a fact: the key stock indices like the S&P 500 continue to make successive highs!
Sadly, this seems to be the only notion going around these days, and I completely disagree with this blind optimism and faulty logic. You can’t look at the key stock indices and conclude that there’s economic growth in the U.S. economy; you need to look at other indicators as well.
Chart courtesy of www.StockCharts.com
As it stands, there seems to be a significant amount of disparity.
Looking at the unemployment rate, the situation is dismal. In the August jobs report of the U.S. economy, we found that there were jobs created and that the unemployment rate actually declined slightly. That’s great, but these jobs were created in the low-wage-paying sectors. On top of that, the jobs added in June and July were revised significantly lower; mind you, the unemployment rate remains very high in the U.S. economy compared to the pre-financial crisis period.
In the U.S. economy, the gap between the rich and the poor continues to increase in the war on the middle class. The income gap among the rich and … Read More
After a strong July, the S&P 500 is looking like it is in correction mode, trading down more than three percent since the beginning of the month and effectively erasing the last two months’ gains. It’s quite possible that the corrective phase could last until early October—that is, if history, looming economic news, and geopolitical issues have anything to say about it.
And that could present a number of interesting opportunities for investors who like to bet against the stock market.
Since 1940, the stock markets have generally performed the worst in September; that doesn’t just include the U.S., but also Germany, Japan, and the U.K. In fact, for the S&P 500, September has posted the worst monthly returns going all the way back to the 1920s. September is even crueler on the Dow Jones Industrial Average, showing a negative bias going back to 1896.
Historical metrics aside, there is a lot of economic news coming out, and a number of looming global events that could add insult to injury. The Federal Reserve could begin tapering its $85.0-billion-a-month quantitative easing policy sooner than later, especially in light of last Thursday’s encouraging economic news that saw U.S. jobless claims drop to their lowest level in six years.
Negative overarching economic news continues to plague the U.S., but chances are that the Federal Reserve will focus on the positive to justify the pullback—it’s what they do. Since many believe the quantitative easing has been fuelling the U.S. bull market, too much good economic news could put a damper on things. That could translate into a further correction on the S&P 500 and … Read More
The economic slowdown in the eurozone has become the topic of discussion lately. The reason for this is mainly because it is sending ripple effects into the global economy, and the growth is being stalled. We have seen countries like Switzerland and China face scrutiny as the economic slowdown picked up in the eurozone. As the demand in the common currency region declined, exports from those nations to the eurozone also deteriorated.
This caused concerns that the major countries in the eurozone, like Germany and France, will see a downturn, which could possibly take the region into another downward spiral.
Surprisingly, those concerns have shown some weakness in the most recent economic news.
Germany, the biggest economic hub in the eurozone and one of the only few countries to weather the economic slowdown in the region, had concerns that business will slow down. Fortunately, the indicators suggest this hasn’t happened yet.
The business confidence in the country has been improving, increasing for a third month in a row in July. In June, the Ifo Institute’s Business Climate Index increased to 106.2 from 105.9; the index is based on a survey of 7,000 business executives. (Source: Randow, J., “German Business Confidence Rises for a Third Month,” Bloomberg, July 25, 2013.) Keep in mind that businesses are the first to see changes in economic conditions; if they are optimistic, it’s considered a good sign for the economy.
But that’s not all: manufacturing in the eurozone also showed signs of relief, improving for the first time since July of 2011. The Flash Eurozone Manufacturing Purchasing Managers’ Index (PMI), reported by Markit, registered at … Read More
Despite the raft of negative economic news we’ve been seeing over the last umpteen months, additional sour news that backs up the prevailing negative winds on Wall Street still manages to shock even the most seasoned of analysts.
According to an article headline published by Dow Jones Newswires, “U.S. Factories Show Surprising Contraction.” I’m not sure why the editors at Dow Jones Newswires would be surprised—disappointed, perhaps, but not surprised—but apparently, they are. (Source: “U.S. Factories Show Surprising Contraction,” NASDAQ web site, June 3, 2013.)
They are surprised, in spite of high unemployment, falling median incomes, an increasing number of Americans receiving food stamps, high personal and student loan debt, and stagnant wages. Even Wall Street seems a little tepid. Of the S&P 500 companies that have issued corporate earnings guidance for the second quarter of 2013, almost 80% have issued a negative outlook.
So I’m not sure why anyone would be surprised that U.S. factories showed a contraction.
The Institute for Supply Management (ISM) said its index of economic activity in the U.S. manufacturing sector contracted in May for the first time since November 2012, and only the second time since July of 2009. After flirting with the 50.0 level, the Purchasing Managers’ Index (PMI) fell to 49.0 in May from 50.7 in April. A reading below 50.0 indicates a contraction in the manufacturing sector and, usually, ebbs and flows in step with the health of the economy. (Source: “May 2013 Manufacturing ISM Report On Business,” Institute for Supply Management web site, June 3, 2013.)
And it’s not as if the United States is an economic island. China, the … Read More
It’s been strange watching the Dow Jones Industrial Average and S&P 500 continue to march higher for the last few months, moving in direct contrast to the underlying economic indicators.
It’s hardly news to anybody that unemployment has remained stubbornly high for years. Personal debt is high, student loan debt is crushing, and the largest portion of debt goes to mortgages. Housing prices have begun to rebound, but they are still down 27.5% from their April 2006 peak. First-quarter gross domestic product (GDP) growth came in at 2.5% percent, far short of the predicted three-percent expansion rate. (Source: “Gross Domestic Product, First Quarter 2013,” Bureau of Economic Analysis web site, April 26, 2013, last accessed May 17, 2013.)
In spite of these signs, the markets have continued to climb higher.
Still, even the most ardent bears were turning a little bullish, afraid to miss out on additional gains. What’s important, I suppose, is that the markets are bullish. People don’t need to know why; they just want to take advantage of it.
But they should tread carefully, as a second raft of ugly data suggests the U.S. economic rebound is anything but healthy. Housing starts plummeted a stunning 16.5%, the most since February 2011, to a seasonally adjusted annual rate of 853,000 from a revised 1.02 million in March. (Source: “New Residential Construction in April 2013,” May 16, 2013, United States Census Bureau web site.)
Initial jobless claims rose unexpectedly for the week ended May 11 to 360,000, breaking a string of weekly declines. Analysts had forecast 330,000 jobless claims for that week. (Source: “Unemployment Insurance Weekly Claims Report,” United … Read More
Very soon, the stock market will be overbought. It’s time to be extremely cautious.
Even in the face of mixed earnings and economic news, institutional investors keep buying this market. And while fundamentals don’t particularly support a rising stock market, there are a number of reasons why institutions have to buy. Here are just three of the reasons:
1. They Have the Money
There is a tremendous amount of cash sitting on the sidelines. Both individual and institutional investors have been very frazzled over the last few years, and corporations have, as well.
Earnings results from large mutual funds and investment corporations recently revealed billions of dollars of new cash inflows allocated to equities. That money has to be put to work, because that’s what customers are paying for.
2. There Is Nowhere Else to Go
Because interest rates are so artificially low, there is no other asset class, other than real estate, where investors can allocate their capital and expect to get a return that is greater than the rate of inflation.
Even if the stock market doesn’t do anything and corporations don’t show any growth in earnings, dividend payments and share buybacks are very well assured.
Institutional investors need to invest in this stock market, because bonds, currencies, and commodities no longer offer the right combination of income, safety, and prospective capital gains. This is why so many blue chips have been outperforming—they offer what the rest of the world does not.
3. They Have to Keep Up with the Joneses
Without a doubt, a herd mentality exists on Wall Street. Investment companies have been chasing the safest … Read More
If corporate earnings are coming in as expected and first-quarter revenues are light, the one thing that is very noticeable is the continuing improvement in balance sheets.
Cash and cash equivalents continue to see increases, and shareholders’ equity is going up. The result of all this continues to be corporations becoming highly reticent to invest in new operations.
As is the case every earnings season, new stock market buyback programs are announced, dividends are increased, and corporations give corporate outlooks that are fairly unspecific. Many corporations reported that they expect business conditions to improve in the bottom half of the year, which is a bit of a cop-out.
No company wants to risk a major earnings flop, and the fourth quarter of 2013 is still just too far off.
One thing that surprised me so far this earnings season is that I really would have thought that share prices would’ve sold off more after reporting. The lack of selling off, which is quite typical in an earnings season, is indicative of a stock market that continues to have positive institutional investor interest.
The stock market already went up tremendously before earnings season began. I think this is a real sign that institutional investors think that this market can go quite a bit higher.
But it is important to the trading action that the stock market does take a meaningful break. Valuations aren’t stretched by any means, but the lack of revenue growth is a problem.
Very few of the large brand-name corporations reduced their full-year outlooks so far this earnings season—this is a good sign. But still, growth expectations are … Read More
In an effort to reduce volatility and protect their investments against the rising cost of living, many investors add commodities to their retirement portfolios. That’s because a large number of commodities are influenced by inflation well before it impacts the overall economy.
The perfect reflection of supply and demand, commodity prices climb when there is strong demand and taper off when the economy is doing poorly; in the latter case, the future looks bleak.
Gold prices collapsed earlier this week, suffering their sharpest fall in 30 years. Silver is also down; so, too, is copper, oil, lead, aluminum, corn, wheat, soybeans—simply put, commodities are getting hammered.
It’s not as if there isn’t news to support the decline in commodities. The U.S. has seen a raft of negative economic news trickle in. April consumer confidence levels fell from 78.6 in March to 72.3—its lowest level in seven months. (Source: Smialek, J., “Consumer Sentiment in U.S. Declines to a Nine-Month Low,” Bloomberg, April 12, 2013.) U.S. retail sales fell 0.4% in March—the largest drop in nine months. (Source: Kowalski, A., “Retail Sales in U.S. Decline by Most in Nine Months,” Bloomberg, April 13, 2013.)
Weaker-than-expected growth in China, Asia’s largest economy, is weighing on global sentiment. China’s economy expanded just 7.7% during the first quarter, below the forecasted eight percent. Industrial output was expected to expand by 10%, but it only climbed 8.9%. (Source: “Market Buzz: Negative outlook on weak data from China,” RT web site, April 15, 2013.)
And conditions in the 17-member eurozone are still dismal. Joachim Starbatty, one of Germany’s pre-eminent economists, said he wants to see the dissolution … Read More
Action in the stock market is robust. Some economic news has shown improvement, but really, investors are just betting on first-quarter earnings.
The Dow Jones Industrials have been strong, outperforming the other indices and revealing how skittish investors are about the stock market’s advance. Investors are buying Johnson & Johnson (NYSE/JNJ) because it’s safe. When the party ends, Johnson & Johnson is less risky.
Institutional investors are betting on stocks because there really isn’t anywhere else to go. The bond play is over, currencies are too risky, and the commodity price cycle is taking a break. While it does seem unbelievable, the Dow Jones Industrials will likely keep ticking higher before the month is out.
While the action is hard to believe, considering the Main Street economy, the Dow Jones Transportation Average is still plowing ahead, leading the rest of the stock market. Regardless, this is the classic sign of further strength in share prices.
The stock market is not expensively priced, and it’s up to corporate earnings to tick higher, so they we don’t create a bubble. Practically, as a stock market investor, it doesn’t pay to fight the Federal Reserve or the tape. The action is the action; if you want to play the market, “why” doesn’t matter too much.
But if you’re an investor and you own, or would like to own, shares in blue chips like the Dow Jones Industrials, it’s tough to be a buyer when the stock market is at all-time highs.
I wouldn’t buy this market, but when there is a major correction, it will be an interesting opportunity to consider. Of course, … Read More
With the uptick in stock market sentiment and economic news, first-quarter earnings season is increasingly likely to be decent. Already, the earnings reports we’re getting show solid growth, particularly in stocks directly related to consumer spending.
Recently, we saw strong financial growth from Costco Wholesale Corporation (NASDAQ/COST), Cabela’s Incorporated (NYSE/CAB), and Target Corporation (NYSE/TGT). The month of February experienced solid growth in consumer spending and Wal-Mart Stores, Inc. (NYSE/WMT) should see its share price tick back up to its high before it releases its earnings report mid-May.
The Federal Reserve has actually been reporting some positive wealth trends over the last two quarters. If you believe the central bank’s statistics, U.S. household debt in the fourth quarter of 2012 grew at its strongest pace since 2008. The data basically imply a little more confidence. A positive sign for consumer spending, household net worth rose by $1.1 trillion to $66.0 trillion in the fourth quarter; we’re seeing the effects of this now in retail sales figures.
The stock market wants to keep going upward over the near term; it just needs more positive news in order to do so. Statistics from the eurozone continue to be terrible, and Britain’s recent industrial production numbers were exceedingly bad. That county is likely to experience continued recession this year.
The picture in the retail/merchandizing sector of the stock market isn’t uniform. You have Macys, Inc. (NYSE/M) in a steady uptrend, very close to its all-time record high, but J. C. Penney Company, Inc. (NYSE/JCP) is getting killed. Macy’s chart is below:
Chart courtesy of www.StockCharts.com
On the stock market, Sears Holdings Corporation (NASDAQ/SHLD) … Read More