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By HaleStewart February 28, 2016 7:36 am
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US Equity and Economic Review: It's Hard to Get Excited About This Rebound, Edition

     US housing news was mixed.  While new home sales decreased 9.2% M/M and 5.2% Y/Y, existing home sales (which is a far larger market) increased .4% M/M.  Let’s compare the data:

The chart converts the data to base 100 for comparison purposes.  New homes sales moved sideways last year, but made post-recession highs within the last 12 months and came close to that level a second time last year.  Existing home sales hit a post-recession high in the 2H15 then dropped at the end of the year.  This month’s number returns existing sales to levels near last year’s high.  Overall, the housing data is still encouraging.  While new homes sales dropped, the data series is volatile and there is no reason to think this is anything other than statistical noise.  And existing home sales are near post-recession peaks.

     Consumer confidence decreased 5.6 points.  However, the bigger potential issue is the decline in future expectations:

The gold line decreased for most of last year which could partially explain the somewhat weaker 4Q15 PCE number.  The decline is hardly fatal, but is something to keep an eye on.       

     Durables Goods orders increased sharply, rising 4.9%.  Even without the volatile transportation component, the figure increased 1.8%.  The large increase is most likely the result of short-term pent-up demand.  And, this data series continue to move sideways, despite the 1-month increase:

However, an increase is certainly better than a decrease, especially with the weak state of industrial production over the last year. 

     And finally on Friday, the BEA released their second estimate of 4Q15 GDP, raising their top-line estimate .3% to 1%.  This table from Doug Short shows the percentage contributions from the various components:

Notice the importance of PCEs to the last four quarters; these expenditures accounted for most or all the top-line growth figure.  In contrast, investment and exports have been a net drag over the last four quarters, with investment slowing growth in 2H15 and exports dragging growth down for most of last year.  Finally, state and local governments have contributed significantly more to growth than federal spending over the last year. 

     The Atlanta Fed’s GDPNow model predicts a 1Q growth rate of 2.1%; the Cleveland Fed’s model shows a 1.9% rate while Moody’s high frequency model has it at 1.6%.  The Atlanta Fed’s recession probability number is 10%, while the Cleveland Feds’ model shows 6.19%.  The NY Fed’s model is at 4.56%.

     Economic Conclusion: this week’s news leans slightly positive.  The first GDP release indicated the 4Q15 was weak, so the slight increase of .3% was welcome.  The reports internals confirmed what we already know: the US is in a manufacturing contraction caused by the strong dollar and weak international trade environment.  Even though the durable goods order data continue in a multi-year sideways range, this month’s increase indicated some pent-up demand still exists.  And overall, the housing market remains in good shape.

     Market Environment: the market is expensive.  The current and forward PE of the SPYs and QQQs is 22.44/20.68 and 16.15/17.35, respectively.

     The earnings environment is still weak.  From Factset:

The blended (combines actual results for companies that have reported and estimated results for companies yet to report) earnings decline for Q4 2015 is now -3.3%. At the sector level, the Energy and Materials sectors reported the largest year-over-year decreases in earnings, while the Telecom Services sector reported the largest year-over-year increase in earnings.

The blended revenue decline for Q4 2015 is now -3.9%. At the sector level, the Energy and Materials sectors reported the largest year-over-year decreases in sales of all ten sectors. On the other hand, the Telecom Services and Health Care sectors are reporting the largest year-over-year increases in sales.

In short, the earnings recession continues.

    Last week’s price action has led some to return to a bullish thesis.  However, looking at the P&F charts for riskier equities indicates we have a long way to go before we can return to that position.

     Let’s start with the IWMs P&F chart:

Prices started selling off in December, which continued through January.  The index experienced a second wave of selling in February.  Prices have rebounded above the starting point for the February sell-off.  But they are still far below recent highs.  And, the chart has turning fairly negative.

     Now let’s turn to the IJHs:

We see a very similar picture to the IWMs:

And finally we have the SPYs, which have simply moved sideways for the last year:

The earnings environment is weak and the economic backdrop is one of slow, meandering growth.  It’s difficult to get excited about this environment.    

 

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