LPL Economic & Market Commentary 2011-10-17
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Post on 07-Nov-2014
DESCRIPTION"Hard data versus soft sentiment: The Sequel" & "A More Durable Rally"
1. LP L FINANCIAL R E S E AR C HWeekly Economic Commentary October 17, 2011 Hard Data Versus Soft Sentiment: The SequelJohn Canally, CFA This week is a busy one for financial market participants, with corporateEconomist earnings reports, economic data and policy all competing for the marketsLPL Financial attention. The European fiscal situation remains at the top of the list of worries for markets, as policymakers scramble to hit a self-imposed early November deadline to have a grand plan in place to address Greece and Highlights European banks exposure to Greek and other troubled sovereign debt. As A busy week for financial market we have noted in several of our recent commentaries, markets are still participants lies ahead, with Europe and crying out for bold, coordinated policy actions here and abroad. Markets in corporate earnings data competing with the past week or so have become increasingly confident that such actions economic and policy events. will be taken although the devil is in the details. The tug of war between the soft But this week, a barrage of third-quarter corporate results (including readings on sentiment-based data and guidance for the fourth quarter and next year), key data on housing, inflation the solid readings on the hard data and manufacturing in the United States, as well as several speeches from continues this week. Federal Reserve officials (including Ben Bernanke) will all also compete for the markets attention. The most closely watched report of the week is likely to be the Feds Beige Book, a qualitative assessment of business and banking conditions in each of the 12 Federal Reserve districts (Boston, Richmond, Dallas, Kansas City, Cleveland, etc.), compiled eight times a year prior to each of the Federal Open Market Committee (FOMC) meetings.Economic Calendar China completes the release of its September and third-quarter data early in the week, with the third-quarter report on gross domestic product, as well Monday, October 17 Wednesday, October 19 as the September reports on industrial production and retail sales. NY Fed Empire State Mfg MBA Mortgage Oct Applications Index wk 10/14 The Sentiment Data Versus the Hard Data: Capacity Utilization Sep Housing Starts The Debate Continues Sep Industrial Production We have written extensively over the past several months about the Sep CPI conflicting messages being sent by the hard data on the economy, and the Sep Tuesday, October 18 soft, or sentiment, data on the economy. Hard data statistically measures PPI Feds Beige Book what consumers or businesses are doing, for example: Sep Thursday, October 20 NAHB Housing Survey Initial Claims How many homes were sold? Oct wk 10/08 How much revenue did a company generate? Ben Bernanke speaks in Trade Balance What were a companys earnings after expenses? Boston Aug Treasury Statement How much did consumers spend on groceries, or computers or television sets? Sep How many cars were produced and sold? Member FINRA/SIPC Page 1 of 4 2. W E E KLY E CONOMIC CO MME N TAR Y How many jet engines were exported overseas? How many new orders for business equipment were placed? How many jobs were created (or lost)? How much oil or gasoline was produced and/or consumed? On the other hand, the soft data are reports that measure sentiment, and do not actually measure anything other than how people or businesses feel. The mood of consumers or businesses is, of course, greatly influenced by what they see around them every day. It is also impacted by what they see on television, in newspapers, on the Internet, on talk radio or from friends, neighbors and colleagues. And of course, lately, the media has been full of bad news on virtually every topic. However, the media itself is thriving on the bad news with some of the highest ratings, readers and listeners in history.We have not seen that yet, but those in In recent months, the hard data has painted a stronger picture of the U.S.the marketplace calling for a recession economy than that reflected by the sentiment data. But at times, thebelieve that the transition from poor opposite is true, and the sentiment runs far ahead of the actual data, as wassentiment to poor data is inevitable. We the case in 1999 and 2000 at the peak of the tech bubble and in the mid- 2000s as the housing bubble was just about to burst.do not and continue to place the odds ofrecession in the near term at about one We expect, however, that the trend of the hard data painting a better picturein three. of the economy than the soft data will continue this week. Ultimately, it is the hard data not the sentiment (or soft) data that will tell us whether or not we have re-entered a recession, have started to shed jobs again, or seen an uptick in inflation. However, poor sentiment (in both the consumer and business oriented segments of the economy) can feed on itself, and lead to a pullback in spending, which would then begin to negatively impact the hard data. We have not seen that yet, but those in the marketplace calling for a recession believe that the transition from poor sentiment to poor data is inevitable. We do not and continue to place the odds of recession in the near term at about one in three.1 Sentiment Based Empire State Manufacturing As this report was being prepared, we received hard data for September Index Shows Contraction, While Hard Data Based (industrial production) and sentiment for October (the Empire State Industrial Production Shows Moderate Growth Manufacturing Index). Often, the sentiment data has the benefit (from the markets perspective) of being timelier. For example, for the most part, this Industrial Production: Manufacturing % Change - Year to Year, Seasonally Adjusted, 2007=100 (Left Axis) weeks hard data on the economy references September, but the weeks Empire State Manufacturing Survey: General Business sentiment-based data is measuring sentiment in October. Conditions: Diffusion Index Seasonally Adjusted, % Bal (Right Axis) True to recent form, the industrial production data revealed that overall 18 40 industrial output (factories, utilities, and mining) increased by a modest 12 20 0.2% between August and September, and that output of factories alone 6 increased by 0.4%. Industrial production, a key gauge of whether or not 0 0 the economy is in or out of recession, is up nearly 4% from a year ago and -6 continues to push higher. Overall, industrial production in the manufacturing -20 sector has increased in 24 of the past 27 months since the end of the Great -12 Recession in June 2009 [Chart 1]. -18 -40 01 02 03 04 05 06 07 08 09 10 11 On the other hand, the Empire State Manufacturing Index, which measuresSource: FRB, FRBNY, Haver Analytics 10/17/11 how manufacturing contacts in New York state feel about their overall(Shaded areas indicate recession) business (as well as employment, shipments, orders, etc.), remained belowLPL Financial Member FINRA/SIPC Page 2 of 4 3. W E E KLY E CONOMIC CO MME N TAR Y zero in October, indicating that manufacturing in the New York state region2 Hard Data (Leading Economic Indicators) Continue contracted for the fifth consecutive month. The good news here is that the to Point to Growth, While Sentiment Data Points to Recession contraction has not picked up momentum. Consumer Confidence (Left Axis) The other examples of hard data (mainly for September and early to mid- Index of Leading Indicators (Right Axis) October) due out this week include: 125 15 Producer Price Index (PPI) 110 10 Consumer Price Index (CPI) 95 5 Housing starts 80 0 Building permits 65 -5 Existing home sales 50 -10 Initial claims for unemployment insurance 1981 1986 1991 1996 2001 2006 2011Source: LPL Financial, Bloomberg Data 09/14/11 Weekly retail sales Weekly mortgage applications and Weekly car and light truck production This rest of the weeks sentiment based data (for September and October) includes: The National Association of Homebuilders Sentiment Index The Feds Beige Book The Philadelphia Fed Index In addition, the index of leading economic indicators (LEI) for September is due out at the end of the week. The index is a compilation of ten data series. Seven of the components of the LEI are hard data, with two being sentiment based. The final component of the LEI is the stock market (as measured by the S&P 500 Index), which is hard data of course, but is often driven over short periods of time by sentiment. The LEI is expected to increase by 0.3% month-over-month in September, which would leave the index a robust 6.0% above its year-ago reading, a clear sign that despite the negative sentiment, the economy continues to grow, albeit modestly.LPL Financial Member FINRA/SIPC Page 3 of 4 4. W E E KLY E CONOMIC CO MME N TAR Y IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Stock investing involves risk including loss of principal. Manufacturing Sector: Companies engaged in chemical, mechanical, or physical transformation of materials, substances, or components into consumer or industrial goods. International investing involves special risks, such as currency fluctuation and political instability, and may not be suitable for all investors. The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. The Producer Price Index (PPI) program measures the average change over time in the selling prices received by domestic producers for their output. The prices included in the PPI are from the first commercial transaction for many products and some services. Empire State Manufacturing Survey is a monthly survey of manufacturers in New York State conducted by the Federal Reserve Bank of New York. The Philadelphia Fed Survey is a business outlook survey used to construct an index that tracks manufacturing conditions in the Philadelphia Federal Reserve district. The Philadelphia Fed survey is an indicator of trends in the manufacturing sector, and is correlated with the Institute for Supply Management (ISM) manufacturing index, as well as the industrial production index. The Industrial Production Index (IPI) is an economic indicator that is released monthly by the Federal Reserve Board. The indicator measures the amount of output from the manufacturing, mining, electric and gas industries. The reference year for the index is 2002 and a level of 100. This research material has been prepared by LPL Financial.The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity. Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit Member FINRA/SIPC Page 4 of 4 RES 3361 1011 Tracking #1-013906 (Exp. 10/12) 5. LP L FINANCIAL R E S E AR C H Weekly Market Commentary October 17, 2011 A More Durable RallyJeffrey Kleintop, CFA The stock market, as measured by the S&P 500 Index, has returned to theChief Market Strategist high-end of the trading range of the past two months, as you can see in ChartLPL Financial 1. This is the fourth time the Index has rebounded to around the 1220 level. Each of the prior three rebounds were reversed as the market was pulled lower again by fears of financial crisis and recession. Rather than retreat back Highlights to the low end of the trading range over the next week or two, there are There are several reasons why this stock several reasons why this rally may be more durable than those that preceded market rally may be more durable than those that preceded it in recent months. it in recent months and may sustain much of the of the gains, as the S&P 500 Index takes a volatile path back toward a modest, single-digit gain for the year. It is possible that the substantial developments in Europe are taking the fear The substantial positive policy developments in Europe are taking the fear of a of a repeat of the financial crisis of 2008 repeat of the financial crisis of 2008 off the table. In addition, solid economic off the table and solid economic data in the data in the United States are taking the fear of a double-dip recession off the United States is taking the fear of a double- table. These positive developments may allow the stock market to breakout of dip recession off the table. the range to the upside, given support from still very low valuations. Other signs that this rally may be more durable include: global cyclical sector leadership, Other signs that this rally may be more durable that those that preceded it declining European TED spread and the , over the past couple of months include: rising yield on the 10-year Treasury note. Global cyclical sector leadership The global economically sensitive Energy and Materials sectors have led the rally while these sectors were in the middle of the pack during prior rallies. Global Cyclical Sectors Materials and Energy No Longer Stuck in the Middle1 S&P 500 Index Back at Top of Two Month Current Stock Market Rally 10/3-10/14 Average of Three Prior Stock Market Rallies* Trading Range Sector % Gain Sector % Gain S&P 500 Index Materials 17.2 Financials 8.71400 Energy 16.3 Industrials 8.41350 Consumer Discretionary 14.2 Consumer Discretionary 8.01300 Information Technology 14.1 Information Technology 7.61250 Industrials 13.3 Energy 7.31200 Financials 11.9 Materials 7.31150 Health Care 6.8 Health Care 6.21100 Consumer Staples 5.4 Utilities 5.6 1050 Telecommunications 3.8 Consumer Staples 4.4 Jan Feb Mar Apr May Jun Jul Aug Sep OctSource: LPL Financial, Bloomberg 10/14/11 Utilities 3.3 Telecommunications 4.0The S&P 500 is an unmanaged index, which cannot be invested into *S&P 500 Rallies 8/10/11-8/15/11, 8/22/11-8/31/11, 9/9/11-9/16/11directly. Past performance is no guarantee of future results. Source: LPL Financial, Thomson Financial, Bloomberg data as of 10/14/11 Past performance is no guarantee of future results. Member FINRA/SIPC Page 1 of 3 6. W E E KLY MARKE T CO MME N TAR Y Declining European TED Spread The key gauge of stress in the2 European TED Spread No Longer Rising financial sector during the financial crisis in 2008 was the widely-watched 3 Month EURIBOR Less EONIA 100 TED Spread, which measured banks willingness to lend to one another. 90 The European equivalent of the TED Spread (EURIBOR less the EONIA 80 rate) had been rising during the stock market rallies that failed to break out 70 of the trading range over the past couple of months. However, over the 60 50 past three weeks, the European TED Spread has been on the decline as 40 financial risks recede in Europe, as illustrated in Chart 2. 30 Rising yield on 10-year Treasury note The 10-year Treasury note yield 20 10 had been steadily declining during the summer stock market rallies that 0 failed to break out of the trading range. Stocks are unlikely to make a Jan Feb Mar Apr May Jun Jul Aug Sep OctSource: LPL Financial, Bloomberg 10/14/11 sustainable rebound when yields are low and falling. The fear of impending economic doom in the United States weighed on the yield, pulling it to levels last seen just prior to the United States entering WWII. However, economic data providing evidence that the United States was not in a recession nor likely to experience a return to recession anytime soon helped to change the direction of Treasury yields. [Chart 3]3 Yield on 10-Year Treasury Note Stopped Falling While the current stock market level has marked an attractive point to sell 10-Year Treasury Yield over the past couple of months as stocks returned to the lows of the year, 4.00 we believe signs increasingly point to a market that is likely to retain much 3.50 of the powerful 10% gain achieved over the past two weeks as it begins a volatile, upward-sloping path back to a gain for the year. Key drivers to watch 3.00 this week regarding the prospects for a breakout are: the start of the flood of third-quarter corporate earnings reports and announcements surrounding 2.50 the October 23 European summit. 2.00 IMPORTANT DISCLOSURES 1.50 Jan Feb Mar Apr May Jun Jul Aug Sep Oct The opinions voiced in this material are for general information only and are not intended to provide specificSource: LPL Financial, Bloomberg 10/14/11 advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise and bonds are subject to availability and change in price. Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of a fund shares is not guaranteed and will fluctuate. The Standard & Poors 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Stock investing may involve risk including loss of principal. Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies. Consumer Discretionary Sector: Companies that tend to be the most sensitive to economic cycles. Its manufacturing segment includes automotive, household durable goods, textiles and apparel, and leisure equipment. The service segment includes hotels, restaurants and other leisure facilities, media production and services, consumer retailing and services and education services. Consumer Staples Sector: Companies whose businesses are less sensitive to economic cycles. It includesLPL Financial Member FINRA/SIPC Page 2 of 3 7. W E E KLY MARKE T CO MME N TAR Y manufacturers and distributors of food, beverages and tobacco, and producers of non-durable household goods and personal products. It also includes food and drug retailing companies. Energy Sector: Companies whose businesses are dominated by either of the following activities: The construction or provision of oil rigs, drilling equipment and other energy-related service and equipment, including seismic data collection. The exploration, production, marketing, refining and/or transportation of oil and gas products, coal and consumable fuels. Financials Sector: Companies involved in activities such as banking, consumer finance, investment banking and brokerage, asset management, insurance and investment, and real estate, including REITs. Health Care Sector: Companies are in two main industry groupsHealth Care equipment and supplies or companies that provide health care-related services, including distributors of health care products, providers of basic health care services, and owners and operators of health care facilities and organizations. Companies primarily involved in the research, development, production, and marketing of pharmaceuticals and biotechnology products. Industrials Sector: Companies whose businesses manufacture and distribute capital goods, including aerospace and defense, construction, engineering and building products, electrical equipment and industrial machinery. Provide commercial services and supplies, including printing, employment, environmental and office services. Provide transportation services, including airlines, couriers, marine, road and rail, and transportation infrastructure. Materials Sector: Companies that are engaged in a wide range of commodity-related manufacturing. Included in this sector are companies that manufacture chemicals, construction materials, glass, paper, forest products and related packaging products, metals, minerals and mining companies, including producers of steel. Technology Software & Services Sector: Companies include those that primarily develop software in various fields such as the Internet, applications, systems and/or database management and companies that provide information technology consulting and services; technology hardware & Equipment, including manufacturers and distributors of communications equipment, computers and peripherals, electronic equipment and related instruments, and semiconductor equipment and products. Telecommunications Services Sector: Companies that provide communications services primarily through a fixed line, cellular, wireless, high bandwidth and/or fiber-optic cable network. Utilities Sector: Companies considered electric, gas or water utilities, or companies that operate as independent producers and/or distributors of power. This research material has been prepared by LPL Financial.The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity. Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit Member FINRA/SIPC Page 3 of 3 RES 3360 1011 Tracking #1-015699 (Exp. 10/12)
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