By Hale Stewart
This was a light week for U.S. economic news. There were two labor market releases. First, the labor market conditions index declined 2.2. This data series, produced by the Kansas City Fed, is remarkably accurate. There's a .83 correlation between it and the monthly change in payrolls for the last 10 years as shown in the following scatter chart:
The BLS released the latest JOLTs report, which showed both hires and job openings declining slightly. But the longer-term trend is more important: hires have been stable since the beginning of 2015 while openings have barely moved higher since the beginning of 2016:
Finally, retail sales rose .6% M/M and 2.7% Y/Y.
The NY Fed's GDP Nowcast predicts 3Q GDP of 2.3% and 4Q GDP of 1.6%. The Atlanta Fed is predicting 3Q GDP of 1.9%.
There was insufficient information to draw a macro level conclusion about the economy, although it should be noted that the Atlanta's and NY Fed's GDP models have been trending lower for the last few months. This is in contrast to the more bullish Federal Reserve predictions for future GDP growth.
Market Outlook: The charts, taken as a whole, are not encouraging.
The IWM (Russell 2000s), which is a good proxy for risk capital, started to rally in early February. But prices formed a rounding top in early October and are now right at support. Momentum is declining.
The transports (which according to Dow Theory should confirm broader price movements) have hit upside resistance 5 times over the last year.
The DIA recently broke a 9-month uptrend regardless of which trend line is used to connect the late February and early September lows.
The good news for the charts is that earnings season may turn out to be moderately positive:
The blended revenue growth rate for Q3 2016 is 2.6%. If the index reports growth in sales for the quarter, it will mark the first time the index has seen year-over-year growth in sales since Q4 2014 (2.0%). Nine sectors are reporting or are predicted to report year-over-year growth in revenues, led by the Consumer Discretionary, Health Care, and Real Estate sectors. Two sectors are reporting or are projected to reporting a year-over-year decline in revenues, led by the Energy sector.
For Q3 2016, the blended earnings decline for the S&P 500 is -1.8%. If the index reports a decline in earnings for Q3, it will mark the first time the index has recorded six consecutive quarters of year-over year declines in earnings since FactSet began tracking the data in Q3 2008.
While the decline in earnings is concerning, it's still concentrated in the energy and basic materials sector:
While the technical outlook is for weaker averages, the macroeconomic backdrop is still modestly bullish: the economy is growing slowly and the earnings damage is contained in the natural resource sector. This is a similar story to the last 4 earnings seasons in the market.