With the U.S. major indices reaching all-time highs recently for the Dow Industrials and the S&P 500, investors are wondering whether or not the best days of 2013 are behind them or if the market has further to run. Unfortunately, the economic data released over the last several months or so hasn't been a real good indicator of market performance either, furthering the indecisiveness of market participants. One thing, however, is for certain; Friday's snap back from the open of trading to the close of trading certainly solidifies the belief that investors aren't willing to fight the Federal Reserve's Quantitative Easing policy.
On Friday April 5th 2013, the Dow Industrials opened roughly 170 points to the downside and by the end of trading the Dow was only down by roughly 40 points. This 130 point swing came on the heels of some rather poor economic and employment releases by the government. Before the market opened, the U.S. Labor Department released the latest Non-Farm Payroll numbers and they were disappointing to say the least. The data showed that during the month of March, only 88,000 jobs were created against an expectation of 190,000 jobs. The 88,000 jobs created was the smallest increase since last June - and nearly half-a-million people stopped looking for work last month, according to data issued by the Labor Department.
What U.S. investors also seemed to discount to some degree on April 5th was the latest employment figures coming from Canada. This is where North American employment data went from bad to worse. Canada's March Jobs Report showed that the country shed 54,000 jobs against expectations of 8,000 jobs being created. Here is what Derek Holt of Scotiabank had to say about the recent economic data in the Canadian jobs report: "This is the ugliest Canadian jobs report since February 2009 and the details generally back up the headline weakness. While we can't read that much into one month's report in a very volatile series, job market momentum has waned into 2013 off of 2012 strengths. On a year-to-date basis, Canada has shed 26,000 jobs concentrated upon this morning's print but also a 21,900 drop in January that combined to offset the 50,700 rise in February." I guess you can say that when it rains, it certainly pours even though you may not have guessed it by looking at the tape by day's end.
Many investors, hedge fund managers and portfolio managers alike are pointing to retail sales showing the true value of the economy and the strength of the consumer. This also leads many to believe that the current levels in the major indices are not only justified, but possibly undervalued against the backdrop of other asset classes. But I would beg to differ with the retail sales data as it's been portrayed in the mainstream media.
February Retail Sales showed a 1.1% increase against expectations of a .5% rise. This was the biggest beat of expectations since October 2011, and the biggest monthly rise in five months. The number was driven by a 5.0% jump in gasoline station sales, a 1.8% increase in miscellaneous store retailers, a 1.6% rise in non-store retailers and a 1.1% increase in the broad retail and food services category. Declines were noted in Furniture stores (-1.6%), Electronics and Appliance stores (-0.2%), and Sporting goods and music stores (-0.9%). Note that these numbers are issued on a seasonally-adjusted basis. So what's the problem with the numbers as issued you might be asking; I'm just about to get to that. First, remember that these numbers are issued on a seasonally-adjusted basis, meaning a calendar shift occurred YOY. If we account for the calendar shift which benefitted sales for the month of February 2013, retail sales actually witnessed a decline in the month of February. The unadjusted headline number in February, which accounts for the calendar shift, actually posted the first sequential decline since 2010, as retail sales declined from $382.4 billion to $381.0 billion. That's right folks a decline was the actual figures which should have been outlined by mainstream media, but naturally it wasn't.
The chart above shows the historical pattern in January to February retail sales changes on an adjusted and unadjusted basis. So maybe you can't believe everything you see and hear in the media. When it comes down to real dollars on an unadjusted basis, retailers witnessed less consumer spending in the month of February this year than last year. I would argue that this will continue through much of the year.
Now let's take a look at the consumer confidence index which declined precipitously when the results were released on March 26, 2013. The consumer confidence index slumped to a reading of 59.7 in March from 68.0 in February. February's reading also was downwardly revised from an initial 69.7 report. Most of the drop was said to have come from a decline in the expectations index, which slumped to 60.9 from 72.4, though the present situation index also fell, to 57.9 from 61.4. Last month's automatic budget cuts known as the sequester came into play with the most recent reading. Economists warn the tighter fiscal conditions will be a drag on.
The economic data only gets worse if we get into the ISM. On April 3, 2013, The ISM said its survey of purchasing managers fell to 54.4% last month from a 12-month high of 56% in February. A reading over 50% signals that more companies are expanding instead of shrinking. Fifteen of the 18 industries tracked by Tempe, Ariz.-based ISM reported growth last month, up from 13 in the prior month. The ISM's new-orders index declined 3.6 percentage points to 54.6% and the employment gauge slid to 53.3% from 57.2%, adding to other evidence suggesting that the pace of new job creation tapered off in March. It's funny how investors not only ignored this early insight into employment data but also the ADP data which preceded the NFP data.
Now investors find themselves heading directly into earnings season which will kick-off this week with Alcoa (NYSE:AA) reporting on Monday after the close of trading and later in the week JPMorgan (NYSE:JPM) and Wells Fargo (NYSE:WFC) reporting on Friday before the opening of trading. The earnings outlook for the current quarter is pretty weak, with growth expected to increase by just 1.6%, compared to 6.2% last quarter, according to Thomson Reuters. The quarter also has seen a high number of negative warnings, with 107 negative revisions for companies in the S&P 500. Compared to the positive revisions, it is the worst pace in 12 years, according to Thomson Reuters.
There will be plenty of economic data on tap this week along with more "Fed speak." The most recent FOMC minutes will be highly anticipated this week and released at 2:00 p.m Wednesday. Probably the biggest pieces of economic data will come on Thursday by way of Initial Jobless Claims and on Friday by way of retail sales.
In light of the most recent economic indicators, the potential continuation of flare-ups on the Korean Peninsula, impact from the Sequester and steady decline of the euro zone economy, investors may decide to trim a little off the top of their respective portfolios. However, many have thought this very same thing for the better part of the last 12 months as the major averages steadily rose to all-time highs.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.