U.S. stocks finished the week up roughly 11% -- capping the best weekly performance since 1974, adding yet another similarity to that bear market – as investors brushed aside weak-to-absymal economic data to focus on better-than-expected profits and thawing credit markets.
Stock-market activity was volatile again on Friday, but the swings occurred above the plus-line for most of the session – which is quite different from what we’ve seen lately, huge moves between gain and loss.
Credit markets appear to be returning to normal – great progress was made last week as LIBOR rates came down big time and commercial paper issuance rolled again.
Another bright spot is earnings as third-quarter profits look much better than expected – ex-financial operating profits are up 16.1% with 70% of members reporting. Overall earnings are down just 10.5%, which is pretty darn good considering the financial sector has endured another quarter of losses.
The economic data was surely ugly last week, and Friday’s releases were no exceptions as we’ll touch on below, but the market has this weakness priced in currently, in our view. From here we’ll see if October marked the worse of it or not; an almost completely frozen credit situation last month did some major damage.
Market Activity for October 31, 2008
Credit Market Indicators
Three-month LIBOR has moved to its lowest level since Lehman Brothers went down.
The TED Spread – an indication of investors’ willingness to take risk – has narrowed significantly as well. There is still a large degree of risk aversion out there, which is why the spread has not narrowed more considering how fast LIBOR has come down. The flight to safety trade has kept T-bills rates low, otherwise this spread would be much narrower.
Friday’s Economic Data
On the economic front, the Commerce Department released personal income and spending figures for September. The income data is holding up, but spending tanked.
Personal income rose 0.2% in September and is up roughly 4% from the year-ago period.
Looking through the various sources of income the slow down in dividend income sticks out as a really nice run for this segment has hit a wall due to the financial-sector slashing payouts. Dividend income growth is down for three-straight months now and on a year-over-year basis has gone from up 9.1% back in March to just 4.1% as of September.
In total personal income is holding up well, up 3.9% from the year-ago period, even as the labor market becomes weaker by the month. Disposable income (after-tax income) is up a solid 4.2% year-over-year, which is a good nominal reading but in real terms it is flat as inflation continues to run 4%-plus.
As the chart below shows (the PCE Deflator is the inflation gauge within the personal spending data) inflation remains sticky, which is always the case. Inflation rates don’t historically come down until several months after an economic downturn as played out. This time we expect inflation to come down significantly for a few months (the combination of weak activity and the plunge in energy prices will be the driving force) but then ramp back up as the Fed has pumped in massive amounts of liquidity – liquidity they will be very hesitant to remove once the economy bounces back as they will make sure a recovery has taken hold.
Spending is a different story as the consumer has definitely run into trouble, we’ve discussed this for a couple of months now as declines in home and stock prices along with a weak labor market prove too much to handle. Even those with the means hold back in a spate of caution.
Personal spending fell 0.3% in September, marking the largest monthly decline in four years. This comes off of two straight quarters in which spending was unchanged, and explains why personal consumption fell the most since the 1990-1991 recession in the third-quarter GDP report.
This consumer weakness is going to be with us for several months. However, the 60% decline in wholesale gasoline will continue to work through to the pump price (which is down just 41% from its peak). Further, the plunge in all energy prices will offer nice relief this winter. The large declines in energy prices will have an incremental effect on consumer behavior.
In another release, the Chicago Purchasing Manager’s Index (PMI) came in at an abysmally weak level in October, falling by the largest degree on record. The main sub-indices within the report – production and new orders – plummeted.
The PMI-Chicago’s Business Index (factory activity within that region) was slammed, falling to 37.8 last month after a strong reading of 56.7 in September. October was really hit by the credit-market freeze-up, not just in a direct way but also from the caution that took over the business community simply for fear of the affects such a disturbance can have.
A reading this low is a clear sign of recession. Even though we’ll need another couple of months of data to gauge the duration of this event, it is crystal clear the events of the past two months have done significant economic damage. If this number remains below 45 for the remainder of the quarter, Q4 GDP is going to be weaker than we currently expect. Right not we’re looking for this quarter’s GDP reading to post -3.0% -- a level that is in line with the typical recession – a reading we haven’t seen since 1990.
The Chicago PMI’s production index came crashing down, posting a reading of 30.9 in October after 71.4 in September. Again, a reading above 50 marks expansion so production moved from a hot pace to very cold in a month’s time.
New orders plunged to 32.5 from 53.9.
This morning we get the national look at the manufacturing sector and you can bet it’s going to be very weak as it is not possible to buck what occurred in the Chicago region.
In fact, we’ll have to prepare for a week of very soft data as construction spending and factory orders will not be pretty. We’ll round out the week with the October jobs data, which will likely show the largest decline yet, possible a decline of 200,000 payroll positions – a number that is also in line with the typical recession. To this point during the nine-month labor-market downturn, monthly job losses have averaged 84,000. This is about to get worse.
The bright side is that it certainly appears the stock market has priced in a nasty recession – either that or the deleveraging event has moved values beyond fundamentals. If we get something that is more like the 1990-1991 contraction (meaningful but pretty short), stocks could rally big time from these levels. Looking out over the next several months it gets more difficult to gauge as the direction of the economy and stocks will depend on the direction of tax and trade policy.
Have a great day!
Brent Vondera, Senior Analyst
Stock-market activity was volatile again on Friday, but the swings occurred above the plus-line for most of the session – which is quite different from what we’ve seen lately, huge moves between gain and loss.
Credit markets appear to be returning to normal – great progress was made last week as LIBOR rates came down big time and commercial paper issuance rolled again.
Another bright spot is earnings as third-quarter profits look much better than expected – ex-financial operating profits are up 16.1% with 70% of members reporting. Overall earnings are down just 10.5%, which is pretty darn good considering the financial sector has endured another quarter of losses.
The economic data was surely ugly last week, and Friday’s releases were no exceptions as we’ll touch on below, but the market has this weakness priced in currently, in our view. From here we’ll see if October marked the worse of it or not; an almost completely frozen credit situation last month did some major damage.
Market Activity for October 31, 2008
Credit Market IndicatorsThree-month LIBOR has moved to its lowest level since Lehman Brothers went down.
The TED Spread – an indication of investors’ willingness to take risk – has narrowed significantly as well. There is still a large degree of risk aversion out there, which is why the spread has not narrowed more considering how fast LIBOR has come down. The flight to safety trade has kept T-bills rates low, otherwise this spread would be much narrower.
Friday’s Economic Data
On the economic front, the Commerce Department released personal income and spending figures for September. The income data is holding up, but spending tanked.
Personal income rose 0.2% in September and is up roughly 4% from the year-ago period.
Looking through the various sources of income the slow down in dividend income sticks out as a really nice run for this segment has hit a wall due to the financial-sector slashing payouts. Dividend income growth is down for three-straight months now and on a year-over-year basis has gone from up 9.1% back in March to just 4.1% as of September.
In total personal income is holding up well, up 3.9% from the year-ago period, even as the labor market becomes weaker by the month. Disposable income (after-tax income) is up a solid 4.2% year-over-year, which is a good nominal reading but in real terms it is flat as inflation continues to run 4%-plus.
As the chart below shows (the PCE Deflator is the inflation gauge within the personal spending data) inflation remains sticky, which is always the case. Inflation rates don’t historically come down until several months after an economic downturn as played out. This time we expect inflation to come down significantly for a few months (the combination of weak activity and the plunge in energy prices will be the driving force) but then ramp back up as the Fed has pumped in massive amounts of liquidity – liquidity they will be very hesitant to remove once the economy bounces back as they will make sure a recovery has taken hold.
Spending is a different story as the consumer has definitely run into trouble, we’ve discussed this for a couple of months now as declines in home and stock prices along with a weak labor market prove too much to handle. Even those with the means hold back in a spate of caution.
Personal spending fell 0.3% in September, marking the largest monthly decline in four years. This comes off of two straight quarters in which spending was unchanged, and explains why personal consumption fell the most since the 1990-1991 recession in the third-quarter GDP report.
This consumer weakness is going to be with us for several months. However, the 60% decline in wholesale gasoline will continue to work through to the pump price (which is down just 41% from its peak). Further, the plunge in all energy prices will offer nice relief this winter. The large declines in energy prices will have an incremental effect on consumer behavior.
In another release, the Chicago Purchasing Manager’s Index (PMI) came in at an abysmally weak level in October, falling by the largest degree on record. The main sub-indices within the report – production and new orders – plummeted.
The PMI-Chicago’s Business Index (factory activity within that region) was slammed, falling to 37.8 last month after a strong reading of 56.7 in September. October was really hit by the credit-market freeze-up, not just in a direct way but also from the caution that took over the business community simply for fear of the affects such a disturbance can have.
A reading this low is a clear sign of recession. Even though we’ll need another couple of months of data to gauge the duration of this event, it is crystal clear the events of the past two months have done significant economic damage. If this number remains below 45 for the remainder of the quarter, Q4 GDP is going to be weaker than we currently expect. Right not we’re looking for this quarter’s GDP reading to post -3.0% -- a level that is in line with the typical recession – a reading we haven’t seen since 1990.
The Chicago PMI’s production index came crashing down, posting a reading of 30.9 in October after 71.4 in September. Again, a reading above 50 marks expansion so production moved from a hot pace to very cold in a month’s time.
New orders plunged to 32.5 from 53.9.
This morning we get the national look at the manufacturing sector and you can bet it’s going to be very weak as it is not possible to buck what occurred in the Chicago region.
In fact, we’ll have to prepare for a week of very soft data as construction spending and factory orders will not be pretty. We’ll round out the week with the October jobs data, which will likely show the largest decline yet, possible a decline of 200,000 payroll positions – a number that is also in line with the typical recession. To this point during the nine-month labor-market downturn, monthly job losses have averaged 84,000. This is about to get worse.
The bright side is that it certainly appears the stock market has priced in a nasty recession – either that or the deleveraging event has moved values beyond fundamentals. If we get something that is more like the 1990-1991 contraction (meaningful but pretty short), stocks could rally big time from these levels. Looking out over the next several months it gets more difficult to gauge as the direction of the economy and stocks will depend on the direction of tax and trade policy.
Have a great day!
Brent Vondera, Senior Analyst
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