The trend of the previous 24 sessions has pushed the S&P 500 27% above the nefarious low of 666 hit on March 9 and it may prove tough to keep this going without some abatement. There has been increasing talk that this upswing is getting a bit long in the tooth, which may have had some effect on overall sentiment – while the S&P 500 closed to the upside, six of the 10 major industry groups closed lower and mid and small cap indices end in the red as well. The Dow average was held back by shares of Exxon, Chevron, Boeing and IBM.
More than anything the market didn’t seem to have the alacrity to take on a decisive position ahead of this morning’s retail sales figure. This retail number will be the big news of the day, maybe the week, and the market may have too much riding on it. Our take is that many market participants have put misguided hope in the fact that consumer activity began a sustained rebound in January and that could kick off the pullback that should be expected after a run like the one we’ve seen over the past month - more on the retail sales report below.
In terms of sector performance, financials and material shares alone pushed the S&P 500 higher yesterday. Goldman Sachs knocked the cover off the ball after the bell, posting operating profit that doubled expectations -- maybe this is enough to for financials keep it going, but considering the bounce over the last five weeks (Goldman shares are up 76% and the sector 85%) the good first-quarter results are likely priced in.
Utilities, energy and telecom shares were the biggest drags on the index. (Energy share were hit by an IEA report that predicted 2009 demand for crude could be cut to the lowest level in five years on lower factory production.) Tech and consumer-related shares also closed lower.
Utility stocks have been the biggest laggard during this five-week upswing. While it’s not surprising to see utilities lag during this abrupt rally, considering the sector’s safe-haven status, one shouldn’t ignore the impact the cap and trade bill that is in the works has had on the shares – if this gets through, or is even implemented piece-meal via executive order, it will hit power-plant margins hard. I prepared a commentary on cap and trade a couple of weeks ago, but there have been so many other things to talk about haven’t had a chance to fit it in. I’ll try to do so when Congress comes back from Easter recess and the topic gets more attention.
Market Activity for April 13, 2009
This Week’s Data
We didn’t have an economic release scheduled for yesterday, but get back to it today with retail sales and PPI.
Producer Price Index (Today)
PPI is expected to come in flat for the month. Core prices, which exclude the food and energy components, are expected to rise 0.1% for the month and remain at 4.0% on a year-over-year basis.
The fact that core PPI is running at this rate on a year-over-year basis at this point in the business cycle shows we’re starting from a high base. When the commodity explosion occurs, and I don’t know how we escape it as global monetary and fiscal policies flood the system with trillions of dollars, the inflation that will ensure should come faster than I think most expect.
Retail Sales for March (Today)
Retail sales are expected to rise 0.3% for March, after a 0.1% decline in February. The ex-auto reading is expected to show a 0.1% increase after rising 0.7% in February. I think there’s a good chance this reading will disappoint, and it will be very important to watch how the market deals with this if indeed it doesn’t meet expectations. There has been a lot of optimism that consumer activity is on the rebound after the 1.0% gain in January, followed by a 0.7% gain on the ex-auto reading for February (even as the overall number showed a 0.1% decline). I’m just not sure we’re back on the road to a sustained consumer upswing as the private-sector components of income remain in decline.
Consumer Price Index for March (Wednesday)
Consumer prices as measured by the CPI are expected to rise 0.1% for both the overall number and the core rate. Core CPI on a year-over-year basis is expected to remain at 1.7%.
Industrial Production for March (Wednesday)
Industrial production (IP) has been in the tank for seven months and the degree of decline for five of the past six months has been unusually pronounced. This number must return to positive territory to offer signs that an economic rebound in upon us. We’ll note, this data has a decent lag to it, so we’ll see evidence that IP is bouncing back in the manufacturing surveys first, as they are more real time releases.
Housing Starts for March (Thursday)
Housing starts showed a strong 22% rebound in February. What the market will be watching for is evidence that at least some of this move was part of a fundamental turn in housing rather than just a rebound from the extremely depressed levels of January, which were weather-related (tough weather conditions across the country in Jan. halted construction projects and better-than usual weather in Feb. helped activity snap back. I don’t think we should expect an increase in March, but if the decline is a mild one it will likely prove a positive for stocks.
Initial Jobless Claims week ended April 11 (Thursday)
Claims are expected to come in at 660,000 for the latest week. This will be an especially important report as it is for the week that corresponds with the April jobs survey. Overall, we need to see jobless claims trend back to the 500K level, which is still an elevated position but moving out of 600K territory will be a very clear sign the worst for the labor market is over – we’re likely weeks away from this move. In addition, continuing claims need to halt making record highs.
Have a great day!
Brent Vondera, Senior Analyst
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