The March jobs report was a lemon, the retail sales report a lemon, European car sales were a lemon, Germany's car sales an even bigger lemon and Egan-Jones downgraded the country's debt rating. The latest GDP data out of China was lemon-flavored. That's a lot to absorb in a few days, leaving little wonder as to why the market has moved back into a negative position for April.
Despite the weakness, though, I don't see this as necessarily the beginning of the spring sell-off. It might be, but mid-April weakness isn't unusual, especially on the heels of tax day. The markets wobbled in 2012 and 2011 at this time of month before bouncing back to finish the month with a rally. Even in the dreary years of 2008 and 2009, April was able to produce decent rallies.
The last time April was unable to come through was 2004, a year that began like this one in the markets: a long rally from the preceding fall that peaked in the spring. The peak came early in 2004, in March, after which the market slowly worked its way lower (though not substantially so) until October, when it revived with a decent year-end rally.
However, nominal GDP in 2004 was running at a steady 6%+ clip every quarter, a level that we have yet to achieve in the current recovery. Real GDP grew at 3.5% that year. The International Monetary Fund's recent downgrade of its US outlook to 1.9% wouldn't seem to make either figure, real or nominal, a racing favorite. Perhaps somewhat ominously, that outlook is similar to 2002's pace, which had a real GDP rate of 1.8% and nominal GDP of 3.5%. April of 2002 saw a decline in equity prices, which didn't augur well for the rest of the year: stocks bottomed out at the end of the third quarter, 25% lower than the end of April.
If it's any consolation, equity prices don't really track GDP all that well. However, they do track optimism, and if the growth scare continues to gain leverage over that sentiment, we could be in for a more protracted slide. The recent slide in commodity prices isn't a fatal one yet, but it seems to me a clear diminution of optimism about growth prospects for 2013.
An uninspiring aspect of earnings so far is the weakish year-on-year revenue growth for many of the larger companies. JP Morgan (NYSE:JPM), Intel (NASDAQ:INTC) and Wells Fargo reported small decreases, while Goldman Sachs (NYSE:GS) and American Express (NYSE:AXP) had very modest increases. Things aren't exactly booming. Yet it would be premature to extrapolate too much from the jumbo financial companies in an environment of very low interest rates. They're not a tailwind for revenues, though better demand might still have overcome some of that. A different tenor may lie ahead for non-financial companies that don't derive a big chunk of revenue from the PC segment.
The market has been chopping quite a bit in recent weeks, and that is usually a sign of more trouble down the road. The operative phrase is down the road, though, as these periods of consolidation are often followed first by rebounds to previous levels. A number of events over the next ten days could pull the S&P back towards the 1600 level again - or down to the resistance level of 1450-1470.
One source of volatility next week will be housing. Homebuilder stocks were rattled a bit this week by the drop in the sentiment index and building permits. Although starts pulled off the biggest monthly number in years, single-family starts and permits fell. All of the starts increase was due to multi-family units, which rose to a level that will almost certainly decline come next month.
Yet the Beige Book talked of "particular strength" in residential construction, pulling many housing stocks back into the green on a difficult day. Existing-home sales are due Monday and in particular, new-home sales are due Tuesday. The market rates to be quite sensitive to the results.
I would also point out in passing that the housing data highlights an ongoing headwind for home buyers: credit remains tight for individual buyers. Investment pools are leading the charge in multi-family construction and ownership. The results of the big banks make it clear enough that they're still running a tight market for individual buyers.
Two other big reports next week are March durable goods on Wednesday and the first estimate of first-quarter GDP on Friday. Goldman Sachs recently raised its first-quarter GDP estimate to 3.2%, a level that seems optimistic to me in light of first-quarter retail sales and government spending. Housing, aircraft and autos are positive contributors, but the mystery element is business investment. January saw a nice rebound from the cliff paralysis in that respect, but spending has slowed since and an extrapolation of the first two months into the quarter could go amiss. The durable goods print for March will give analysts a better notion of what to expect from Friday's GDP release.
An important factor that rates to be in favor of the impending GDP estimate is the deflator, or adjustment for inflation. It has appeared to be quite sensitive to energy costs in recent years, such that even with inflation running at 1.5%-2.0%, a quarter that sees oil prices falling - as they've been doing - might get a very low deflator of half that rate or less. Since it's subtracted from the current GDP estimate, if the latter only managed to stay at the prevailing annual rate of 4% in the first quarter, a deflator of 1% or less could give the market the 3%+ print it craves. That could cause a rip reversal to the upside in stocks as the growth-scare scenario is defied, for a day or two anyway. The bravado might not last, but that's a worry for another time.
The other pieces of the puzzle may well come over the next few days from industrial stocks like IBM, Honeywell (NYSE:HON), and GE on the one hand, and the software sector on the other. I make no predictions, but if IBM (Thursday) and the latter two (Friday) can make some soothing sounds about the rest of the year, it could give the markets something to grab onto. A positive McDonald's (NYSE:MCD) on Friday wouldn't hurt either, especially after Coca-Cola (NYSE:KO) and Johnson and Johnson (NYSE:JNJ) comforted staples investors this week.
Cloud-related stocks command some of the highest valuations in the market and start reporting next week. If they do well, or at least don't disappoint, that might steady nerves also. The rush of trading money back into high-beta names on Tuesday made it plain that many believe that there is still some juice to be squeezed out of stocks.
The Cirrus (NASDAQ:CRUS) debacle, beside taking a hit out of Apple's (NASDAQ:AAPL) stock price, has further tarnished sentiment for Nasdaq stocks (and EBay didn't help matters last night). To my casual glance, the Cirrus reaction looked a bit overdone, but falling Nasdaq sentiment would be a problem for the markets, especially if the financials stay under pressure. Apple reports next week and while it's obvious that sentiment is quite negative and the stock oversold, a dud report will still hurt the indices.
A final obstacle remaining to any larger correction getting underway now, though, is the angel of central banking. The day may come when markets lose their child-like faith in following easy money, but it isn't here yet. The European Central bank meets again in early May, and Bundesbank (Germany) President Jens Weidmann hinted Tuesday that the ECB could cut rates again (probably after seeing the German auto sales figures).
Combine a cut with a few Fed governors murmuring that QE is likely to stay for the rest of the year, and markets might not hit their springtime peak until next month. Mr. Weidmann also warned of the dangers of too much reliance on monetary policy, and that the European debt crisis could take another decade to fix. Both statements sound reasonably correct, and neither sound like he is any more amenable to restructuring European debt than the elected leaders whose inaction he lamented. Don't repeat their error - short-term price action in the markets is not a reliable indication that all is well enough underneath. The bill is still coming due.