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Initial Jobless Claims came in today at 320,000, well above the consensus expectation of 295,000 and the highest level since last May. This is not a one-off. Over the past month, economic data in the U.S. has consistently fell short of expectations. Below is a list of examples which includes data on manufacturing, housing, retail sales and more.
The Citigroup Economic Surprise Index illustrates a running tally of the “beats” and “misses” as it increases in value with better-than-expected data and declines on worse-than-expected data. As you can see, it has been moving straight down of late and the string of data “misses” has not been this persistent since 2012.
S&P 500 company earnings also came in far below expectations entering the year, with 4th quarter earnings declining 12% versus the 4th quarter of 2013. This decline was the largest since the expansion began in June 2009.
In February, U.S. equities not only ignored weak economic data and earnings, but seemed to consistently rally on their release. With new all-time highs reached once again in a vertical fashion, the market was delivering a resounding “we don’t care.”
Why don’t market participants seem to care? There are a number of possible reasons, including:
1) While worse than prior years, we have seen this movie before with weaker economic data in the first half of the year only to be followed by stronger data in the second half. Because of this pattern, no one actually believes the weak data will persist into anything resembling recessionary conditions.
2) On the earnings front, most believe the decline will be temporary and by the fourth quarter of 2015 companies will be reporting 30% year-over-year growth.
3) The weakness in economic data and earnings has coincided with a tidal wave of global easing. Thus far in 2015, over twenty central banks have announced easing measures. In March alone, we have already seen rate cuts by China, India, and Poland.
In an easy monetary policy world, there is an increasing belief among market participants that economic fundamentals and earnings simply do not matter anymore. The only thing that matters when it comes to short-term share prices is multiple expansion. On that point, the current Shiller P/E of 27.85 is now higher than all other periods outside of 1929 and the late 90’s-2000 tech bubble. However, the perception remains that multiples will continue to expand and perhaps surpass these prior peaks as long as central banks continue to ease.
There is also a strong contingent of market participants who argue that any weaker data is actually bullish for stocks because it means the Fed will stay at 0% for even longer (“lower for longer”). If everything in the short-run is about easy money, this rationale may not be as crazy as it seems.
But When Will They Care?
Yes, of course, this is the key question but unfortunately impossible to answer as it is based entirely on psychology and not any objective criteria. The prevailing psychology after years of easy money and rising markets will not be easily swayed, but certainly there are a few factors that may test its resolve.
First, while most of the world continues to ease, the U.S. Federal Reserve is closer to hiking rates than it has been at any point since 2010 (according to Fed Fund Futures). The futures market is currently anticipating a September rate hike (6 months away, see chart below), but I believe there is a high probability of the Fed moving before then. Regardless of when they move, the regime is changing, and it would be naïve to believe that psychology will not change with it.
Second, should the economic data and earnings continue to weaken, that might test the resolve of market participants who are not currently expecting such an outcome. And if such weakness occurs at the same time the Fed is hiking rates, this would be even more problematic as the “bad news is good news” crowd would be silenced.
For now, though, market participants are likely to continue to focus on easy money and ignore fundamentals as this is what has served them well in recent years. With that in mind, expect the March 18th FOMC announcement to again be critical, particularly if the Fed finally drops its “patient in normalizing” policy language. I know many of you would rather focus on fundamentals, but this is the market we are still living in for now, hanging on the Fed’s every word.
This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts. He is the co-author of two award-winning research papers in 2014 on Intermarket Analysis and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors, an institutional investment research firm. Previously, Mr. Bilello held positions as an Equity and Hedge Fund Analyst at billion dollar alternative investment firms, giving him unique insights into portfolio construction and asset allocation.
Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.
You can follow Charlie on twitter here.
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