By Hale Stewart
The latest LEIs and CEIs showed continued weakness. Half the leading indicators declined. The manufacturing slowdown was evident, with the ISM new orders number negative for the last 6 months and manufacturers' new orders down in 3 of the last 6 months. In contrast, 3/4th of the coincident indicators rose. However, the pace of increases for both numbers is slowing:
The LEIs' 6-month rate of change slowed from 2 six months ago to a mere .3 in the latest reading. The CEIs' 6-month figure is more constant, but is still fluctuating between .9 and 1.2. In his analysis, Doug Short notes the LEIs moved sideways since April, and their 6-month rate of change is nearing the 0 level. Here's the Conference Board's overall assessment of the data:
The Conference Board LEI for the U.S. increased slightly in February, but the pace of growth has eased compared to six months ago. Meanwhile, The Conference Board CEI for the U.S. has been rising at a slow and steady pace. Taken together, the current behavior of the composite indexes and their components suggest that the expansion in economic activity should continue in the near term, albeit at a moderate pace.
Retail sales continue their weakness, declining .1%. And the December to January number was revised sharply lower, moving from +.2% to -.4%. My co-blogger was less than impressed with these numbers. Retail sales have moved sideways since 2Q15:
Housing news was positive. Although building permits were down 3.1% M/M, they rose 6.3% Y/Y. Housing starts, however, are on fire: they increased 5.2% M/M and a whopping 30.9% Y/Y. And the increase occurred in 1-unit structures, as this chart from Calculated Risk shows:
Ed Leamer famously argued that housing is the business cycle. Given some of the weakness we've seen in other indicators, let's hope he's right.
Industrial production declined .5%. The Fed reports the data in two groupings, and both show weakness:
Regardless of how you break down the data, it comes up negative. However, Capital Spectator has a different perspective:
The bottom line: there's an upside edge in today's numbers, particularly when we focus on the annual trend. The headline data for industrial activity remains weak, but this is mostly due to softness in mining and utilities. By contrast, the firmer trend in the cyclical manufacturing sector implies that industrial output overall will rebound in the months to come. In other words, the red ink in the headline industrial index may not be the ominous signal for the business cycle that it appears to be.
Let's hope he's right.
All three GDP models (the Atlanta Fed's, the Cleveland Fed's and Moody's) are predicting 1Q GDP growth of 1.9%. The Atlanta Fed's recession model shows a 10% recession probability, while the Cleveland Fed's model is 8.82%. The NY Fed has a 7.2% reading.
Economic Conclusion: Although positive, the US data continues to deteriorate. The combined reading of the LEIs and CEIs is for continued weak growth; retail sales have stalled, while industrial production continues to move lower. Housing is the only bright spot, but without any support from other sectors, it's difficult to see how it can keep US growth as anything but anemic.
Market Outlook: The market is still expensive. The current and forward P/E for the SPYs and QQQs is 23.61/21.45 and 17.05/18.09, respectively. The revenue and earnings picture is weak. From FactSet:
The estimated revenue decline for Q1 2016 is -0.8%. If this is the final sales decline for the quarter, it will mark the first time the index has seen five consecutive quarters of year-over-year declines in sales since FactSet began tracking the data in Q3 2008. Five sectors are projected to report year-over-year growth in revenues, led by the Telecom Services and Health Care sectors. Five sectors are predicted to report a year-over-year decline in revenues, led by the Energy and Materials sectors.
The estimated earnings decline for Q1 2016 is -8.4%. If this is the final earnings decline for the quarter, it will mark the first time the index has seen four consecutive quarters of year-over-year declines in earnings since Q4 2008 through Q3 2009. It will also mark the largest year-over-year decline in earnings since Q3 2009 (-15.7%). Only three sectors are projected to report year-over-year growth in earnings, led by the Telecom Services and Consumer Discretionary sectors. Seven sectors are projected to report a year-over-year decline in earnings, led by the Energy, Materials, and Industrials sectors.
To reiterate, we're potentially looking at 5 consecutive quarters of revenue declines and four consecutive quarters of earnings declines. These are bear market statistics. And they go a long way in explaining why I continue to be slightly bearish regarding the markets.
Sector performance over the 1- and 3-month time frames supports a bullish outlook, with energy, basic materials and industrials leading. Over the last 6 and 12 months, performance becomes more defensive, with utilities and consumer staples leading.
While this week's headlines imply a strong, bullish case for the markets, the charts argue for a more sanguine outlook. Let's start with the daily SPY chart:
Prices made a double bottom in mid-January and February. Prices have since rallied, crossing over the 200-day EMA. The 10- and 20-day EMAs are now over the 200-day EMA, with the 50-day EMA close to achieving that level. However, the MACD is getting stretched, and the 209 price level (which provided significant resistance) waits.
And then there are the mid-cap and small-cap averages:
The mid-caps (IJH, top charts) just crossed over the 200-day EMA. But their MACD is looking very stretched. And the Russell 2000 (IWM, bottom charts) is still below its 200-day EMA with the same problem.
When you combine the stretched nature of all the averages with the weak earnings outlook, it's difficult to see the market continuing its move higher. The Fed is the only thing supporting the market. And an additional round of QE is highly unlikely at this point. As of now, the latest SPY rally looks like a technical bounce that will hit topside resistance at the 209-212 area, which provided half a year's of resistance in 2015.