Another April, another low-volume rally. Junior writers will struggle with their leads for explaining Wednesday's rally - maybe it was because Chinese imports were higher than forecast. Or perhaps they were cheered by evidence the Fed will remain accommodative.
Maybe they'll say that investors are encouraged by the prospects for first-quarter earnings. So far, the ratio of negative to positive warnings for the quarter is about five to one, the worst since the fall of 2001. The consensus estimate for earnings growth has fallen to about minus two percent. Of course, that means the Street is really expecting something along the lines of three to five percent - have to have those earnings "surprises," after all - but after share buybacks and inflation, there isn't much real growth left to speak to justify that 18 times multiple.
Before you object on the grounds of forecast earnings, I haven't forgotten that annual mirage. A year ago, Alcoa (AA) was forecast to earn $0.23 in the past quarter. It earned $0.11 in the event, excluding items, and "beat" the recalibrated consensus. Naturally, that goes into the quarterly scorecard of companies beating estimates.
Last year was the same story it's been for the last three years - great second-half earnings are projected, then estimates get cut all the way into the fourth quarter, then someone sings about how many companies beat estimates while we have our end-of-year rally.
If you still insist that equities are cheap, consider the chart of the Shiller adjusted P/E:
The Shiller P/E might not be a great short-term timing indicator, but it does belie the argument of how cheap stocks are. We're in the danger zone.
Some brokerages have been plumping the outlook for GDP this year, based on the notion that confident businesses are expanding and confident consumers are spending more. Here's a chart of wholesale sales and inventories for the last 20 years:
Source: Avalon Asset Mgmt Co, US Commerce Dept.
It doesn't look like we're in the middle of confident expansion to me. In fact, the unadjusted inventory-to-sales ratio is the highest it's been since February 2010. As I recall, that period was followed by such confident, robust expansion that the Fed felt called upon to begin quantitative easing in August.
First quarter consumer spending will get a boost from Easter falling in March instead of April. The consensus estimate for the month's retail sales, due Friday, is for no change from February, one of the most laughably rigged numbers I've seen in some time. It's true that the sales rate for autos was down slightly from February, but Redbook showed a gain of 0.8% for its chain-store survey in March.
Easter is one of the three events of the year that we always open our wallets for (the other two being Christmas and back-to-school). I look for a gain of at least 0.3%-0.5%. If it comes through, it'll be another big "surprise," generating a couple of days of hyperbole about the resilient consumer, the growing economy and the omniscient stock market. Then in May, the media can start wondering again where the three of them went.
The main ingredients for the current move upward are still calendar-based. Number one, it's April, and the stock market is entitled to a rally. The last time the month stumbled was in 2005. Number two, it's the beginning of first quarter earnings season. The boxes are programmed and ready to buy until the end of earnings season, and traders are ready to follow them. All the Fed needed to do was not say tightening was imminent, and the regular crowd - which isn't all that big, but does move the tape - could go to work.
It's tempting to say what the market really needs is another lousy jobs report, when you look at the 3%+ move from Friday's open:
(click to enlarge)That's not entirely facetious, by the way. One of the key ingredients that kept the market up in 2007 as parts of the economy (like housing) tanked was the prospect for a rate cut, though it couldn't save the market for long when it finally came. An earlier cut couldn't have saved the economy anyway. I still expect that the play on the Fed not cutting back on QE to get some more mileage this year.
In recent years, there's been a tendency at times to take whatever the current market overshoot is - up or down - as a sign of something deeper. But it's just a trade. It isn't earnings-based, it isn't macro-based, it isn't based on the economy or housing or US oil, or whatever other story might get passed around to justify the current momentum trade. It's just a bet that nothing big enough comes up this week to derail this week's train. The market likes to rally around Fed minutes anyway, the text was flexible enough to push back the anxiety (pre-jobs report) that QE might get taken off the table, and it was a classic chart breakout to boot.
I wrote last month to expect another burst that would "quite possibly" take the S&P past 1600. It may only take until Friday. QE is back on the table, it's the start of April earnings, and you should expect to ride for two more weeks. The first of May is a good candidate for the last day of the run as well, but trying to pick the exact day isn't worth the effort. Some claim that a May-June fade is over-anticipated or too repetitious, though such flaws posed no problem at all to the first-quarter rally. It isn't clear either why it should be too pat for May-June to be down four years in a row when April is about to be up for eight years in a row.
March was up on a good jobs report: The economy is recovering. April is up on a bad jobs report: The Fed is back in the game. The tape makes the narrative it needs. When it starts to sell off again, the excuses that will be made won't be new ones either. Right now the market is dreadfully overbought on both an intermediate and long-term basis, but there's a bit of room left short-term. We should top out soon, somewhere between 1600 and 1625, where you can start buying the TLT or TIP US Treasury ETFs. Then equities can get on with giving it all back again.