Sometimes markets emphasize simple themes, rejecting even modest efforts at nuance. The current big stories are the record highs in stocks, the length of time since the last significant correction, and the “market is rigged” meme. These themes are all easily grasped and interesting media fodder. It has set the agenda.
Meanwhile, the economy seems to be providing a positive answer to early 2014 skepticism – Weather (!) or Not?
The contrast between the economic fundamentals (and impending earnings results) and the “soft” stories will be the dominant theme during the upcoming week.
Prior Theme Recap
In the last installment of WTWA before my vacation, I expected the theme to feature new Fed Chair Janet Yellen in her first press conference. Some might have questioned that forecast, since we had already heard plenty from Yellen both in confirmation hearings and in her “Humphrey-Hawkins” testimony to Congress. What could be new?
The era of Fed transparency yields ever longer statements, economic forecasts, and assurances about future guidance. There are also many speeches. The press conferences by the Fed Chair, given only when the overall forecast has been updated, require extemporaneous answers to questions from financial reporters. It can be a minefield.
In response to question about how long the Fed might delay raising rates after QE ended, she hesitated and said a considerable time. With further pushing she mentioned “six months.” This sent stocks into a downward spiral, since there is an over-reaction to any hint of Fed tightening even a modest reduction in the extremely easy Fed policy. Those who have been reading “A Dash” know better than to invest on such reactions, so we had yet another buying opportunity as the clarifications ensued. The theme actually extended over the next ten days.
This all reminded me of Ben Bernanke’s first year, when he made a few comments to CNBC’s Maria Bartiromo at the White House correspondents’ dinner. This is a fun affair, but Bernanke learned that he was not “off the record” and the result was a market-moving story. Bernanke admitted that it was a “lapse in judgment.”
This is a perfect illustration of the reason for my weekly post – planning for the week ahead. Readers are invited to play along with the “theme forecast.” I spend a lot of time on it each week. It helps to prepare your game plan for the week ahead, and it is not as easy as you might think.
This Week’s Theme
In the absence of much fresh news, we can expect another week of pundits on parade. I am calling this fluff versus fundamentals.
On the fluff side I expect to see the following:
- More Michael Lewis follow-up stories about rigged markets.
- More charts comparing the current bull market with prior crashes. They just keep coming – at least this one has an expiration date!
- An assortment of death crosses, complains about volume, and omens.
- Any decline in stock prices – even of a few percentage points – as evidence that the “big one” is at hand.
On the fundamental side we have the following:
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Spring has changed the outlook. Ed Yardeni notes the rebounding economic indicators and summarizes as follows:
I have been predicting that the stock market would respond positively to rebounding economic indicators even though everyone knows that some of that strength is simply weather related rather than a sign of economic strength. Nevertheless, investors might have been concerned that the winter’s weak numbers might have been fundamentally weak rather than just depressed by the big chill.
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Stronger capital expenditures are in prospect. If you read only one thing this week, check out Cardiff Garcia’s seven points about capex. His conclusion is a bit cautious, despite the strong evidence:
We still buy the economic slack argument for why this recovery has room to run, and to run faster than it did last year. But we also recognise that much of the case for an impressive capex pickup could have been made, and by some research teams was made, at the start of last year as well.
The discussion will include some early speculation about Q1 earnings reports.
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.
Last Week’s Data
Each 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 news is market-friendly. Our personal policy preferences are not relevant for this test. And especially — no politics.
- It is better than expectations.
The Good
It was a big week for data including plenty of good news.
- Rail traffic growth is strong. Todd Sullivan notes that it could involve some catching up from weather effects, but the growth is quite large and unusual to see this early in the year. See Todd’s postfor full discussion and charts.
- Auto sales are strong, bouncing back more than expected and 81% over the recession lows. Ford F-150 sales, a good indicator for small business and construction, had the highest March total in seven years. See the Bespoke story and their helpful charts. Scott Grannis has a full discussion along with this chart:
