Commercial & industrial loans, which reached an all-time high late in 2013, are now growing at a low double-digit pace, according to data from the St. Louis Fed. This data suggests that businesses are feeling better about the demand outlook in their various parts of the economy.
The strong loan trend, along with acceleration in the money supply and generally strong economic data, suggests a favorable environment for stock acceleration. Granted, coming out of the Memorial Day weekend the market enters its toughest stretch in any trading year. But summer gains have been known to buck the "Sell in May" trend. Given the static stock market this year amid rising earnings and strengthening economic activity, budding valuation excesses have been nipped. The market appears attractive and poised for further gains, assuming it can get past the summer slump.
Good News from FRED
Late in 2013, the volume of commercial & industrial loans issued by commercial banks recently hit an all-time high of $1.69 trillion (seasonally adjusted). The data is from FRED (Federal Reserve Economic Data, maintained and issued by the Federal Reserve Bank of St. Louis) and shows that C&I loan activity exceeded the prior peak of $1.59 billion set in November 2008. C&I loan activity slid all the way down to $1.2 trillion in August 2010.
In 2010, loan activity began to accelerate, eventually reaching growth of 12.5% in the third quarter of 2012 (measured as annual rate of change, seasonally adjusted). Annual C&I loan growth then slowed to low- to mid-single-digits, however, across 2013. In the first quarter of 2014, loan growth accelerated to a 12.5% annual rate - roughly double the 6.5% rate prevailing six months ago. By taking on these loans, companies across the commercial and industrial economy are expressing a level of confidence not much seen (excepting the brief period late in 2012) since the middle of the last decade.
Banks also appear to be feeling more confident about the solvency and business prospects of their customers. The Federal Reserve Board conducts a lending survey on bank lending at the beginning of each year. The January 2014 Senior Loan Officer Opinion Survey on Bank Lending Practices is based on responses from 75 domestic banks and 12 U.S. branches and agencies of foreign banks. The survey from this past January indicated that, on balance, banks eased their lending policies for C&I loans to firms of all sizes and experienced stronger demand for such loans. Almost all C&I banks that eased their lending policies, according to the Federal Reserve Board survey, did so in response to increased competition for such loans.
Rise in Leading Indicators
Argus Chief Investment Strategist Peter Canelo maintains a proprietary measure of weekly leading indicators. Peter's "MUnCL" model incorporates changes in money supply, initial unemployment claims, industrial commodities and commercial & industrial business loans. In addition to the improving loan activity documented above, all other MUnCL components are in an improving trend.
Strategist Canelo points out that money supply growth is broadly at a one-year high. Argus looks at a money supply composite comprised of M-1, M-2, and MZM, which is the broadest measure of checkable deposits. Growth in this composite recently reached 8.6%, just below its highest level of growth in the past year. M-1 growth has surged to 13.4%, according to Canelo, as bank lending has picked up.
In mid-May, initial unemployment claims slipped below 300,000. Continuing claims are now trending in the 2.65 million range. These are levels not seen since mid-2007, which was before economic activity began the decline that culminated in the great recession. Simultaneously, commodity prices are perking up. Peter points out that the CRB Raw Industrials index (excluding energy) has risen 6% since last fall, while the broader CCI index is up 11%.
Beyond the mortgage market per se, one driver of growing loan activity may be the housing market. Investors have been wondering if the slowdown in housing activity this past winter was the result of harsh weather, or indicative of some exhaustion in the sector. Certainly, much of the housing recovery has been investor-driven. As housing prices rise and investors perceive the low-hanging fruit as having been plucked, the potential absence of investors in the housing market could cause further weakness.
Housing data from this spring is easing those concerns. Canelo notes that between January and April, Housing Starts increased 19.5%, while building permits increased 14.3%. Both data series declined on a year over year basis across the final quarter of 2013. Existing and new housing activity was particularly good in April.
The data coming out of the Memorial Day holiday provided further encouragement to economy bulls. Durable goods order for April rose 0.8%, much better than consensus expectations for a 1.3% pullback from a strong March number (revised to up 3.6%, from a preliminary 2.9% gain). Two housing price indicators - the Case-Shiller 20-City Index and the FHFA Housing Price Index - both indicated rising prices. And Consumer Confidence for May improved to 83.0, from 81.7 in April.
As we noted last week, inflation is beginning to show signs of rising. Argus believes bond yields are well below levels justified by the long-term inflation rate. That is contributing to the relative attractiveness of stocks at current levels. Though the market is entering the summer doldrums, about one-third of summers in the past 35 years have featured 5%-plus appreciation. And those summers have tended to prefigure double-digit stock market gains for the full year. We would thus maintain exposure to the equity market over the summer months, particularly amid signs of accelerating business and loan activity.
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. I have no business relationship with any company whose stock is mentioned in this article.