The S&P 500 dipped a piddling 0.5% last week on the usual light volume. On the other hand, thirty day volatility, as measured by the VIX, crept higher, after reaching multi-year lows the week before. More and more data are suggesting that typical many investors have fled the stock market and have instead shifted a greater percentage of their funds into bonds and other fixed income assets. This has left professional traders and other sources of fast money to drive stock prices higher. After two 50+% market plunges over the last 10 years and essentially zero total returns, it seems as though Main Street is refusing to take the risk of incurring more losses.
On the macro front, the news was light. Housing was the biggest story and the results were disappointing. The Housing Market Index came in at 29, not the 30 that was predicted. Housing starts (especially single family home starts) dropped, instead of rising slightly as expected. Existing home sales fell; they were supposed to rise. The Mortgage Bankers’ association index of mortgage applications plunged, as interest rates began to tick up. New home sales fell, badly missing what was supposed to be an increase. Finally, in housing, the FHFA housing price index did not show any signs of rising, as expected. All in all, the experts who have been predicting a “recovery” in housing EVERY year starting in 2009, seem to have blown it again. Not only is the US housing market not recovering; it’s still falling.
At the end of the week, economist David Rosenberg of Gluskin Sheff came out with an interesting observation about the US economy. Over the last few months, the consensus in the media has been that the US has somehow successfully decoupled from the rest of the world, most of which is slowing down or in recession already (most of Europe is in recession again, China is either suffering from a soft or hard landing, Japan is stumbling as usual, Australia is slowing because of the Chinese slowdown, and Brazil and India are also slowing and introducing policy responses to fight their respective slowdowns). So amazingly, the world—its economy and its risk markets—has been depending on America to save the day.
So David Rosenberg’s simple observation was quite disturbing because he noted that 11 of the 13 most recent economic indicators in the US have indisputably missed consensus expectations. And the only two that supposedly “beat” (car sales were spiked by channel stuffing and jobs grew courtesy of seasonal adjustments) were arguably massaged by the government to produce better results.
And Rosenberg reminds everyone that the stock market is not always a leading indicator of the economy. He notes that it’s “amazing how many people out there believe that the economy is improving just because the S&P 500 managed to get to 1,400 this past week. The market doesn’t always get it right.”
Well, not immediately.
Also of note is that most of the 11 indicators that “missed” are true leading indicators of where the economy is headed. Remember, GDP results announced every quarter are historical results—relying on these results to forecast is akin to driving a car using a rear view mirror.
And finally, these misses are just that actual misses. Rosenberg isn’t projecting misses. He’s simply observing that they’ve already occurred.
There’s little to argue about here. The US economy is slowing down. The question is simply how soon and how hard.
The next question is: how will the markets react? Especially since they’re priced on the exact opposite–no slowdown in US economic growth, no slowdown in corporate sales growth, no slowdown in corporate profit growth and no meaningful impact from near record high oil and gas prices.
Over the next few weeks, not months, we’ll know the answers.