STOCKS COME ALL THE WAY BACK: Here's what you need to know

Stocks made a u-turn in afternoon trading, rallying into positive territory after opening lower for a second straight day, as crude oil did the exact same thing.

First, the scoreboard:

  • Dow: 16,484.24 +52.46 (0.32%)
  • S&P 500: 1,929.61 +8.34 (0.43%)
  • Nasdaq: 4,542.61 +39.02 (0.87%)

And now, the top stories on Wednesday:

Something is wrong

A gigantic sector of the economy flashed red today.

Markit’s flash services
purchasing manager’s index, a preliminary reading on the sector, fell into contraction for the first time in over two years. At 49.8, it was the first time since the recession that service-sector activity contracted, except for during the government shutdown in October 2013.

The services sector makes a giant contribution to economic growth, and so we’re now looking at a significant risk of the US economy falling into contraction in the first quarter,” according to Chris Williamson, chief economist at Markit.

Markit explained that bad weather (remember winter storm Jonas?) played a role. Also, business people got fewer orders for new work because their clients were growing less confident in the economic outlook.

The recent consensus had been that economic growth was chugging along fine, helped by consumer spending and a strong labour market. This was happening even as financial markets were in turmoil. And so the data today interrupts that narrative.

Now here come some caveats: This is a flash reading, and so we have to wait another week for the final reading, along with the ISM’s non-manufacturing composite, that would give us a more robust picture of what’s going on. Also, as RBC’s Tom Porcelli highlighted in a note, the ISM non-manufacturing index is still in expansionary territory above 50. The reverse is true for the manufacturing series, but Markit’s reading above 50 is not being used to counter ISM’s index that’s below 50.

He writes (emphasis ours),

Folks, when it comes to digesting economic data we actually cannot have our cake and eat it too. That point aside, ask yourself what makes more sense given what we know from an unbiased perspective about the state of things in the US: that the service sector would slip below the critical 50 threshold before manufacturing, or vice versa? According to Markit, it’s the former that makes most sense.

We’ll say it again, if we see signs that growth is going to slow sharply in the US, we will gladly change our call–but the Markit PMI is surely not going to be that trigger for us.

More housing data

New home sales fell more than expected in January, by 9.2% at an annual rate of 494,000. That was worse than expected, and a slowdown from the 8.2% drop at an annual rate of 544,000 in December. Much of the sales decline was in the west (32%).

Economists at Jefferies and Pantheon Macroeconomics noted that the regional data can be unreliable.

“The series on new home sales is often choppy, but through some of the noise in the data, it appears that home sales are continuing to trend higher over time off of historically low levels,” wrote JP Morgan’s Daniel Silver in a client note. “We maintain our view that the housing market will continue to recover.”

And two earnings releases Tuesday — from Home Depot and Toll Brothers — confirmed that the housing market is still healthy.

Lowe’s provided a third big anecdote with its quarterly results today. The home-improvement giant reported better-than-expected sales, with same-store-sales growth of 5.2%. However, its net earnings fell year-over-year to $11 million from $530 million, and that was because of a $530 million impairment charge it suffered with the exit of its joint venture in Australia.

And for the current fiscal year, Lowe’s expects that its sales will rise 6% to $62.62 billion, as it continues to ride the housing boom.

Existing home sales for January unexpectedly climbed, according to data out yesterday. Home prices numbers are due Thursday.

Chesapeake Energy is buckling

As expected, Chesapeake Energy has a smaller capital expenditure budget this year than next year, as it focuses on keeping a healthy balance sheet and maintaining liquidity.

In the earnings announcement Wednesday, the company also had sold or agreed to sell $700 million in assets, which was higher than the amount it told investors in December. Chesapeake is aiming to divest from up to $1 billion of its assets to raise cash.

Earlier this month, Chesapeake shares plunged more than 50% following a Debtwire report that it had hired Kirkland & Ellis to restructure $9.8 billion in debt. And on Wednesday, the stock was up by more than 21%, which must have been some relief for Carl Icahn, who holds 73 million shares.

Forecasters are bad at forecasting

We just got the annual Economic Report of the President, and we found two of the charts quite interesting.

As Andy Kiersz wrote on the first, consensus forecasts on the unemployment rate a few years out have tended to be much higher than the actual rate.

For instance, the consensus thought the unemployment rate would be above 5% until at least 2020. However, it only just fell to 5% in October.

And here’s Exhibit B, which Myles Udland called the most depressing chart in the world:

It shows that the International Monetary Fund has consistently cut its global growth forecast, only for that forecast to be too aggressive.

But what’s sadder about this is how the IMF thought in 2011 that 2016 gross domestic product would grow by 5%. If only.


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