Economic signals keep flaring and continue to be ignored by markets. Today, GDP was revised short of economists' expectations and Weekly Jobless Claims increased. Cypriot banks reopened with restrictions and droves of people were waiting to take money out. Commentary out of Germany was about how Cypriot anger would pass. That kind of thinking raises the specter of similar actions occurring in the future, putting depositors at risk and raising the probability of a banking shock to the system. Yet, today the Financial Select Sector SPDR (XLF) is only fractionally lower. Meanwhile, earnings estimates have seen dramatic revisions lower and a great many economic issues still need reconciling. Are we ignoring the signs of another soon coming recession?
In Germany today, retail sales were reported higher by 0.4% in February, leading European shares up, with the Vanguard MSCI Europe ETF (VGK) higher by 0.8% before 10:00 AM ET. But the market ignored the fact that German unemployment increased at the same time. It's just another example of a popular trend.
Fourth quarter GDP was revised higher, yes, to 0.4% from the previously revised +0.1% (from -0.1% initially reported). Still, the rate of growth in absolution is terrible. Also, economists surveyed by Bloomberg had forecast a revision higher to 0.6% growth, so the relative result is bad as well.
It's my view that GDP this year is threatened, and that our financial keepers at the Federal Reserve have ignored their own warning that the payroll tax break expiration and sequester spending reductions would impact economic growth by 1.5 percentage points. The Fed's latest math on the economy just does not add up and seems to ignore the issue. Why would the Fed ignore its own warning?
Weekly Initial Jobless Claims increased by 16,000 in the latest reported period, and the four-week moving average increased as well. With the weekly flow now back up to 357K, it seems our comfort level should adjust lower. Consumers seem to have adjusted already, with the Consumer Confidence Index showing this week a severe drop-off in sentiment. I suggested that this was due to the real impact of payroll tax increase against just previously raised consumer expectations on rising stock prices and a seemingly less obstructive political factor. Consumers seem to no longer be ignoring the signs, and we'll get personal spending data tomorrow, or soon if the reporting data has been moved due to holiday.
Despite the financial fear in Cyprus and the repercussions across European banks, American bank shares have continued to show strength. Bank of America (BAC) and Citigroup (C) are leaders of late on the recovering housing market in the U.S. and what was expected to be a reviving U.S. economy. However, today, each of these shares is lower, perhaps reflecting a new perspective rising about the economy.
The broader market continues to ignore the signs of recession, with the SPDR S&P 500 (SPY) up fractionally today. However, I see the SPY threatened because of its underlying reliance on a perception of economic improvement. We seem to have ignored some important signals, and it's about time for the SPY to reconcile reality. A three day weekend here should return calmed investors to an economy next week that gets new data on employment. I've been pointing out that the real unemployment rate is much higher when adjusting for workers who have simply fallen off the radar, and is probably closer to 11.8% and underemployment closer to 18%. Will the market ignore that problem as well? How long can we continue to disregard the negative data?