U.S. stocks fell for the first day in four as consumer confidence fell for a second-straight month. Worse-than-expected same-store sales results from Coach Inc. and Office Deport only increased concerns regarding the consumer.
Still, the market nearly shook off the weakness late in the afternoon session, the S&P 500 was down as much as 1.4% just before lunch, closing lower by just 0.25%. This is pretty remarkable considering what the readings on the consumer are showing. The labor market is going to keep the largest part of the economy fairly inactive and people will continue to focus on building cash savings. There seemed to be some illusions that personal consumption would make a comeback sooner than what is realistically likely, I think those illusions will dissipate as we get results for the back-to-school season.
While it is true the gridlock in Washington right now is a huge help in buoying the broad market as it appears the worst we’ve feared on the policy front will not come to fruition. Better-than-expected profit and housing-market results are major contributors as well. However, we’ve rallied 47% from the March 9 low and we still have another wave of housing issues to deal with -- I fear, a commercial real estate turndown that may only be in its mid-innings, consumer defaults on the rise, and a number of actions from Fed programs to administered loan modifications to government transfer payments to artificially low interest rates to cash-for-clunkers (which will offer a one-two month boost to auto sales but nothing more) that will be taken away. The market knows these are not sustainable or longer-lasting policies yet stocks continue to hold the high ground. The resilience is a good sign, but you’ve got to be prepared for a meaningful pullback, don’t get too excited and chase this thing – hold steady
American Express and Exxon led the Dow Average lower – AMEX because the stock has gotten ahead of itself at 26 times earnings and CC defaults in record territory and Exxon pulled back with the entire energy sector after British Petroleum’s CEO stated there is little evidence of a recovery in energy demand.
Utility, energy and basic material shares led the decliners. Technology, telecom, health-care and consumer discretionary (strangely) led the advancers. Roughly 1.1 billion shares traded on the NYSE Composite, about 12% below the three-month average.
Market Activity for July 28, 2009
S&P/CaseShiller Home Price Index
The S&P CaseShiller index showed that home prices fell 17.06% on a year-over-year basis in May for the 20 major metro areas the composite tracks – economists were expecting a 17.9% decline.
While still harsh, this reading marks the second month of improvement for year-over-year results. The improvement is most evident by way of the three-month annualized change, coming in at -8.81% in May after an 18.11% decline for April and a 25.26% plunge in March.
On a monthly basis, CaseShiller showed the first increase in nearly three years, up 0.45% as 14 of the 20 cities tracked registered a gain in prices – this is non seasonally-adjusted (NSA); S&P does release a seasonally-adjusted figure after the official release, which showed prices declined 0.16% June to July.
Certain cities in the West -- LA, Seattle, Phoenix and Vegas -- and the two from Florida – Tampa and Miami – continue to show price declines even on a monthly basis. These are the areas that have witnessed the highest levels of foreclosures. These six cities also make up roughly a third of the total index, which is why we’ve explained that the heavy weight to these foreclosure-laden cities causes this index to exacerbate the decline in home prices.
The other housing-market gauges also showed that prices rose in May, but the market will continued to be challenged by rising foreclosure filings and a lack of demand due to the fragile labor market. I wouldn’t expect a string of increases, but it is pretty clear that we’ve moved beyond the extremely depressed nature of housing to an environment that remains considerably less bad, yet still uncertain.
Consumer Confidence
The Conference Board’s Consumer Confidence reading fell for a second-straight month in July as worries over the nature of the job market worsened enough that the rally in stock prices were unable to offset. The headline survey hit 46.6 this month, which puts the index at the low points of the past four recessions – 1974, 1980, 1981-82 and 1990-91 (FYI, I don’t term the 2001 downturn a recession because it never recorded back-to-back declines in GDP).
The most important reading within the survey, especially with the jobless rate pushing to double-digits and the duration of unemployment at an all-time high (going back to 1947), is the net jobs “plentiful” jobs “hard to get” figure; the reading hit a 26-year low of -44.5 (lower segment of chart below). Those citing jobs as “plentiful” fell to 3.6% of respondents, down from 4.5% in June. Those stating jobs as “hard to get” jumped to 48.1% from 44.8% in the prior reading.
We have cautioned against the tendency to get excited as the confidence readings rose from the deep lows hit in February and March as the stock market rose from its lows. Some seemed to assume the bounce off of these levels was a sign further improvement in sentiment would ensue. Unfortunately, we’re now seeing the troubled state of the job market (and the decline in wealth even if the stock market has rallied hard off of its lows) is keeping consumers’ outlook in the tank and this does not bode well for a sustained housing rebound and certainly does not indicate that consumer activity in general is poised to make a steady comeback.
Economically speaking, we will very likely see GDP post its first positive print in a full year when the third-quarter figure comes out in October, but this will be a statistical recovery off of very low levels. The consumer needs time to get things right again, and businesses will take their time before they increase payrolls. As a result, the largest segment of the economy will continue to pressure on growth. We’ll see how the bulk of the stimulus spending (flowing through in 2010) counters this decline in personal consumption.
Richmond Fed
On a brighter note, the Richmond Fed reported that their index of factory activity remained in expansion mode for a third-straight month, jumping to 14 in July from 6 in June.
All sub-indices of the survey either rose or remained in expansion mode with the exception of employment. New order volume jumped to 24 from 16 in June, shipments rallied to 16 from 2 and capacity utilization doubled to 14 from 7. These are great moves, now if we can get the various other regional manufacturing reports to show the same degree of improvement, and the national factory survey (ISM) to move closer to expansion mode, it will help confirm the third-quarter of 2009 will post the first positive print on GDP in four quarters.
Have a great day!
Brent Vondera, Senior Analyst
Still, the market nearly shook off the weakness late in the afternoon session, the S&P 500 was down as much as 1.4% just before lunch, closing lower by just 0.25%. This is pretty remarkable considering what the readings on the consumer are showing. The labor market is going to keep the largest part of the economy fairly inactive and people will continue to focus on building cash savings. There seemed to be some illusions that personal consumption would make a comeback sooner than what is realistically likely, I think those illusions will dissipate as we get results for the back-to-school season.
While it is true the gridlock in Washington right now is a huge help in buoying the broad market as it appears the worst we’ve feared on the policy front will not come to fruition. Better-than-expected profit and housing-market results are major contributors as well. However, we’ve rallied 47% from the March 9 low and we still have another wave of housing issues to deal with -- I fear, a commercial real estate turndown that may only be in its mid-innings, consumer defaults on the rise, and a number of actions from Fed programs to administered loan modifications to government transfer payments to artificially low interest rates to cash-for-clunkers (which will offer a one-two month boost to auto sales but nothing more) that will be taken away. The market knows these are not sustainable or longer-lasting policies yet stocks continue to hold the high ground. The resilience is a good sign, but you’ve got to be prepared for a meaningful pullback, don’t get too excited and chase this thing – hold steady
American Express and Exxon led the Dow Average lower – AMEX because the stock has gotten ahead of itself at 26 times earnings and CC defaults in record territory and Exxon pulled back with the entire energy sector after British Petroleum’s CEO stated there is little evidence of a recovery in energy demand.
Utility, energy and basic material shares led the decliners. Technology, telecom, health-care and consumer discretionary (strangely) led the advancers. Roughly 1.1 billion shares traded on the NYSE Composite, about 12% below the three-month average.
Market Activity for July 28, 2009
S&P/CaseShiller Home Price IndexThe S&P CaseShiller index showed that home prices fell 17.06% on a year-over-year basis in May for the 20 major metro areas the composite tracks – economists were expecting a 17.9% decline.
While still harsh, this reading marks the second month of improvement for year-over-year results. The improvement is most evident by way of the three-month annualized change, coming in at -8.81% in May after an 18.11% decline for April and a 25.26% plunge in March.
On a monthly basis, CaseShiller showed the first increase in nearly three years, up 0.45% as 14 of the 20 cities tracked registered a gain in prices – this is non seasonally-adjusted (NSA); S&P does release a seasonally-adjusted figure after the official release, which showed prices declined 0.16% June to July.
Certain cities in the West -- LA, Seattle, Phoenix and Vegas -- and the two from Florida – Tampa and Miami – continue to show price declines even on a monthly basis. These are the areas that have witnessed the highest levels of foreclosures. These six cities also make up roughly a third of the total index, which is why we’ve explained that the heavy weight to these foreclosure-laden cities causes this index to exacerbate the decline in home prices.
The other housing-market gauges also showed that prices rose in May, but the market will continued to be challenged by rising foreclosure filings and a lack of demand due to the fragile labor market. I wouldn’t expect a string of increases, but it is pretty clear that we’ve moved beyond the extremely depressed nature of housing to an environment that remains considerably less bad, yet still uncertain.
Consumer Confidence
The Conference Board’s Consumer Confidence reading fell for a second-straight month in July as worries over the nature of the job market worsened enough that the rally in stock prices were unable to offset. The headline survey hit 46.6 this month, which puts the index at the low points of the past four recessions – 1974, 1980, 1981-82 and 1990-91 (FYI, I don’t term the 2001 downturn a recession because it never recorded back-to-back declines in GDP).
The most important reading within the survey, especially with the jobless rate pushing to double-digits and the duration of unemployment at an all-time high (going back to 1947), is the net jobs “plentiful” jobs “hard to get” figure; the reading hit a 26-year low of -44.5 (lower segment of chart below). Those citing jobs as “plentiful” fell to 3.6% of respondents, down from 4.5% in June. Those stating jobs as “hard to get” jumped to 48.1% from 44.8% in the prior reading.We have cautioned against the tendency to get excited as the confidence readings rose from the deep lows hit in February and March as the stock market rose from its lows. Some seemed to assume the bounce off of these levels was a sign further improvement in sentiment would ensue. Unfortunately, we’re now seeing the troubled state of the job market (and the decline in wealth even if the stock market has rallied hard off of its lows) is keeping consumers’ outlook in the tank and this does not bode well for a sustained housing rebound and certainly does not indicate that consumer activity in general is poised to make a steady comeback.Economically speaking, we will very likely see GDP post its first positive print in a full year when the third-quarter figure comes out in October, but this will be a statistical recovery off of very low levels. The consumer needs time to get things right again, and businesses will take their time before they increase payrolls. As a result, the largest segment of the economy will continue to pressure on growth. We’ll see how the bulk of the stimulus spending (flowing through in 2010) counters this decline in personal consumption.
Richmond Fed
On a brighter note, the Richmond Fed reported that their index of factory activity remained in expansion mode for a third-straight month, jumping to 14 in July from 6 in June.
All sub-indices of the survey either rose or remained in expansion mode with the exception of employment. New order volume jumped to 24 from 16 in June, shipments rallied to 16 from 2 and capacity utilization doubled to 14 from 7. These are great moves, now if we can get the various other regional manufacturing reports to show the same degree of improvement, and the national factory survey (ISM) to move closer to expansion mode, it will help confirm the third-quarter of 2009 will post the first positive print on GDP in four quarters.Have a great day!
Brent Vondera, Senior Analyst
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