U.S. stocks gained additional ground in a holiday-shortened session Friday, capping the best week for the S&P 500 since the bear market of 1974. The broad market jumped 12.03% last week; although this followed an 18.5% decline during the first three weeks of November.
We saw essentially the same trend occur in October as the S&P 500 lost a massive 30% in the first three weeks of the month, then to bounce back with a 10.5% rise in the final five sessions.
This week we’ll find out whether we’ll return to the down side and make another new multi-year low or this rally has a more sustained action to it. At some point we’ll bounce strong off of these levels as it seems stocks have the vast majority of bad news priced it. Just as traders push things to far to the upside, the same is true on the way down. The move lower has been so swift and massive over the past two months that a powerful rally is quite likely.
However, this move higher will have its limits; a sustained upswing – one that lasts more than a few months – will quite possibly need a tax-rate response to the current economic weakness in order to have staying power. Public infrastructure projects can kick economic growth higher, but this Keynesian-style stimulus does not have a long life. When the spending comes to an end, so does the economic advance. Conversely, when tax rates on capital and income are lowered, it offers incentive affects for risk-takers (capital formation is kick-started and thus the seed-money to future innovation increases) and producers have an incentive to invest in plant and equipment (fueling productivity gains and job creation); this is why the policy has a longer life.
In any event, a move that gets the stock indices a good deal higher from here will be very welcome. We’ll have a lot of economic data out this week and a couple of the big releases will post really weak results, we won’t have to wait long to find whether or not these events are fully priced in.
Market Activity for November 28, 2008
Shopping Season
Friday was one of the biggest shopping days of the year – known as Black Friday because traditionally this is when most retailers begin to make a profit for the year – and activity certainly surpassed expectations. Sales rose 3% to $10.6 billion from $10.3 billion in 2007. I was expecting a decline due to both lower volumes and desperate discounting as consumers waited longer expecting additional discounts to arise.
Retailers certainly engaged in aggressive discounting, so the fact that sales grew 3% shows volumes and spending per customer were higher. According to the National Retail Federation, shoppers spent 7.2% more on average than they did in 2007 – this is probably the fuel savings consumers have been holding onto showing its presence. On average, the typical family is saving roughly $300 per month on gasoline purchases. Since the spending figures were so weak in October and the first half of November the consumer – in the aggregate – probably has some decent fire power for the holiday season.
We’ll see if it extends throughout the shopping season or if this was more of a one shot deal. Based on this weekend’s results we have a good chance of posting decent spending numbers for December, which will help a GDP report for the period that is likely to be the worst since the 1981-82 recession.
OPEC
And speaking of energy prices, OPEC decided to push off their decision on output this weekend for another two weeks. One wonders if this has something to do with Iran ramping up its desires to gain hegemony in the region – OPEC members like Saudi Arabia, UAE and Kuwait may not be too enthused about agitating the U.S. right now as it is only Israel and the U.S that stand in the way of the Iranian desire to control the region’s resources. It does seem strange for them to put off the decision to cut output considering the degree to which oil prices have declined. We may find they cut production two weeks out, but something has the leaders of the cartel holding off especially since they state a price of $75 per barrel is desired.
This Week’s Data
We’ll get a number of important economic releases this week, beginning with ISM manufacturing this morning – this is the Institute for Supply Management’s national look at factory activity. The reading is going to post another really weak reading, possibly worse than the October reading, which was the worst since 1982. However, the market expects this after what we saw from the Chicago-area factory survey last week, the lowest level of activity also since 1982.
Later in the week we’ll get a look at service-sector activity for November, of course initial jobless claims (as we get every Thursday) and the November jobs report. The jobs number is expected to post its largest monthly decline in payrolls since the nadir of the 1990-1991 and 2001 recessions/downturns.
Last week we received a number of reports from the housing market and all were depressed – new and existing home sales along with the price gauges all gave pause to those thinking the worst is behind us.
However, we’ve talked about how the homes available for sale readings have plunged. (Yes, home supply relative to the very low sales pace remains elevated but we’re talking just of the number that shows home production activity. As a result, when sales activity does pick up the inventory-to-sales ratio will decline fast.) This is one optimistic look at things.
The other is the fact that housing (technically, fixed residential investment) as a percentage of GDP is nearly at it lowest level since 1982 (we’re seeing a lot of numbers that compare to that recession) and this is likely signaling the worst is behind us – if not we’re closing in on it.
The chart shows the level and duration spent above the long-term average certainly justifies the move below this average. But now that we have moved far below it, improvement may not be too far out. Importantly, residential construction declines will not affect the GDP reading as harshly as it did when the market made up 5%-plus of the overall economy. We’ll have to get past the traditional drag on housing, which is a weak labor market, but for now the drag will be less and hopefully a year out we’ll begin to see it contribute again.
Have a great day!
Brent Vondera, Senior Analyst
We saw essentially the same trend occur in October as the S&P 500 lost a massive 30% in the first three weeks of the month, then to bounce back with a 10.5% rise in the final five sessions.
This week we’ll find out whether we’ll return to the down side and make another new multi-year low or this rally has a more sustained action to it. At some point we’ll bounce strong off of these levels as it seems stocks have the vast majority of bad news priced it. Just as traders push things to far to the upside, the same is true on the way down. The move lower has been so swift and massive over the past two months that a powerful rally is quite likely.
However, this move higher will have its limits; a sustained upswing – one that lasts more than a few months – will quite possibly need a tax-rate response to the current economic weakness in order to have staying power. Public infrastructure projects can kick economic growth higher, but this Keynesian-style stimulus does not have a long life. When the spending comes to an end, so does the economic advance. Conversely, when tax rates on capital and income are lowered, it offers incentive affects for risk-takers (capital formation is kick-started and thus the seed-money to future innovation increases) and producers have an incentive to invest in plant and equipment (fueling productivity gains and job creation); this is why the policy has a longer life.
In any event, a move that gets the stock indices a good deal higher from here will be very welcome. We’ll have a lot of economic data out this week and a couple of the big releases will post really weak results, we won’t have to wait long to find whether or not these events are fully priced in.
Market Activity for November 28, 2008
Shopping Season
Friday was one of the biggest shopping days of the year – known as Black Friday because traditionally this is when most retailers begin to make a profit for the year – and activity certainly surpassed expectations. Sales rose 3% to $10.6 billion from $10.3 billion in 2007. I was expecting a decline due to both lower volumes and desperate discounting as consumers waited longer expecting additional discounts to arise.
Retailers certainly engaged in aggressive discounting, so the fact that sales grew 3% shows volumes and spending per customer were higher. According to the National Retail Federation, shoppers spent 7.2% more on average than they did in 2007 – this is probably the fuel savings consumers have been holding onto showing its presence. On average, the typical family is saving roughly $300 per month on gasoline purchases. Since the spending figures were so weak in October and the first half of November the consumer – in the aggregate – probably has some decent fire power for the holiday season.
We’ll see if it extends throughout the shopping season or if this was more of a one shot deal. Based on this weekend’s results we have a good chance of posting decent spending numbers for December, which will help a GDP report for the period that is likely to be the worst since the 1981-82 recession.
OPEC
And speaking of energy prices, OPEC decided to push off their decision on output this weekend for another two weeks. One wonders if this has something to do with Iran ramping up its desires to gain hegemony in the region – OPEC members like Saudi Arabia, UAE and Kuwait may not be too enthused about agitating the U.S. right now as it is only Israel and the U.S that stand in the way of the Iranian desire to control the region’s resources. It does seem strange for them to put off the decision to cut output considering the degree to which oil prices have declined. We may find they cut production two weeks out, but something has the leaders of the cartel holding off especially since they state a price of $75 per barrel is desired.
This Week’s Data
We’ll get a number of important economic releases this week, beginning with ISM manufacturing this morning – this is the Institute for Supply Management’s national look at factory activity. The reading is going to post another really weak reading, possibly worse than the October reading, which was the worst since 1982. However, the market expects this after what we saw from the Chicago-area factory survey last week, the lowest level of activity also since 1982.
Later in the week we’ll get a look at service-sector activity for November, of course initial jobless claims (as we get every Thursday) and the November jobs report. The jobs number is expected to post its largest monthly decline in payrolls since the nadir of the 1990-1991 and 2001 recessions/downturns.
Last week we received a number of reports from the housing market and all were depressed – new and existing home sales along with the price gauges all gave pause to those thinking the worst is behind us.
However, we’ve talked about how the homes available for sale readings have plunged. (Yes, home supply relative to the very low sales pace remains elevated but we’re talking just of the number that shows home production activity. As a result, when sales activity does pick up the inventory-to-sales ratio will decline fast.) This is one optimistic look at things.
The other is the fact that housing (technically, fixed residential investment) as a percentage of GDP is nearly at it lowest level since 1982 (we’re seeing a lot of numbers that compare to that recession) and this is likely signaling the worst is behind us – if not we’re closing in on it.
The chart shows the level and duration spent above the long-term average certainly justifies the move below this average. But now that we have moved far below it, improvement may not be too far out. Importantly, residential construction declines will not affect the GDP reading as harshly as it did when the market made up 5%-plus of the overall economy. We’ll have to get past the traditional drag on housing, which is a weak labor market, but for now the drag will be less and hopefully a year out we’ll begin to see it contribute again.
Have a great day!
Brent Vondera, Senior Analyst
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