Weekly Report
Valentine's Day lies ahead, but the coming week should feel more like Christmas because the government is on track (we presume) to deliver some new recovery packages for the financial sector and the U.S. economy.
Just as any child has a feel-good vibe for Santa Claus, the market appeared to have a feel-good vibe for the impending packages as evidenced by a 6% gain in the financial sector and a 5.2% gain for the broader market this week.
It was an interesting response given the absence of confirmed specifics on the structure of these recovery packages, which are separate but likely to be at least equal in their high cost.
The Treasury market seemed to appreciate that last, fine point as it got weighed down by concerns over the supply of government debt that will be forthcoming to finance the growing deficit.
The stock market, in its inimitable way, focused on the rosier side of things, which is the notion that new recovery plans by a new administration will be the stuff a long-awaited rally is made of as confidence in the government's ability to steer us out of this crisis is restored.
That belief overshadowed generally disappointing earnings news and/or guidance from some major companies, including Disney (DIS), Kraft (KFT), Costco (COST), Ryder (R) and Cisco (CSCO).
The economic news was a mixed bag.
Both the manufacturing and services surveys completed by the ISM topped expectations, with notable upticks in their indexes for new orders. Pending home sales in December increased 6.3%, setting the stage presumably for an uptick in existing home sales for January.
Fourth quarter productivity was up 3.2% and brought the year-over-year productivity gain to 2.7%, which is a bit above the long-term trend. The productivity gain, though, reflects the ability of businesses to cut back work levels quickly rather than improved practices. It's decent news, but doesn't have much economic implication.
Despite some better-than-expected economic news, nothing altered our perspective that the economy is a bearish factor for the stock market.
The ISM data, while better, simply reflected a business condition that isn't contracting as fast as it once was. The bigger consideration is that it is still contracting and one month of seemingly encouraging news does not a trend make.
At the same time, there was nothing heard in the latest government employment report to think consumer attitudes will change with respect to job (in)security.
Payroll losses totaled 598K positions in January, which was the largest monthly loss in 34 years. Factoring in revisions, 1.77 million jobs have been lost in the last three months alone. The unemployment rate stands at 7.6% (vs. 4.9% a year ago) while the real unemployment rate, which accounts for marginally attached workers, plus total employed part time for economic reasons, reached 13.9% in January (vs. 9.0% a year-ago).
Continuing claims are at a record high of 4.79 million and we continue to hear a number of real-time job cut announcements from major corporations that make it challenging for many to accept the idea that employment is a lagging indicator.
Personal spending dropped 1.0% in December and personal income dipped 0.2%, reflecting the decline in employment levels. Vehicle sales were atrocious, slipping to an annualized rate of 9.6 million units in January, which was 7% below the December level.
The stock market has gotten carried away before in cheering government stimulus measures. It runs a similar risk here of giving the government too much credit for its management skills.
To be sure, this isn't a garden variety recession and it is an increasingly challenging proposition to get consumers and businesses to spend/borrow freely again at a time when job security has been taken away and a newfound appreciation for paying down debt and saving money has taken root. The Senior Loan Officer Survey released this week spoke to this challenge.
On the bright side, the number of banks tightening lending standards "edged down slightly" (note: that doesn't mean they eased their standards) while more banks showed less reluctance to lend than reported during the October survey. However, the demand for loans from both businesses and households continued to weaken.
Just as the number of discouraged workers continues to move up, it appears the number of discouraged borrowers does, too. Or, perhaps it is a case of businesses and households just not wanting to take on more debt.
Either way, it won't be stimulating enough for the economy to incentivize the banks to lend if the borrowers don't feel the need to borrow. This is a real risk that threatens to extend the timing of an economic recovery.
Still, hope springs eternal in the short term for a stock market that suffered its worst January on record and is coming off its worst year since 1937.
If the market is able to avoid sticker shock, one has to respect the prospect that we could see a shift in sentiment in the short term as the stock market runs with the idea of having renewed confidence in the government and rallies despite plenty of uncertainty still about the timing of an economic recovery.
That reminds us of a scene in Oscar-winning movie Terms of Endearment where Shirley MacLaine's character is confronted with news from a doctor that her daughter has a malignant tumor. Upon hearing this, she asks what she should do. The doctor responds that they tell family members "to hope for the best, but prepare for the worst." To this McClain's character responds, "And they let you get away with that?"
Unfortunately, we feel a lot like that doctor these days as little is certain about the road ahead.
There is hope things will get better, but there is still reason to think they can get worse. Investors should be positioned accordingly to capitalize on either possibility.
Patrick J. O'Hare, Briefing.com
