Welcome to March!
Stocks exploded higher on Tuesday to bring March in like, well, a bull. (As of yet, there are no market-related analogies about whether lions or lambs are better for investors.)
The Dow, S&P 500, and Nasdaq all gained nearly 2% on Tuesday as manufacturing data was better across the board though auto sales came in a touch light for February.
Alternatively, the rally may have been all about how bearish investors had gotten.
First, the scoreboard:
- Dow: 16,838, +322, (+1.9%)
- S&P 500: 1,975, +43, (+2.2%)
- Nasdaq: 4,681, +123, (+2.7%)
- WTI crude oil: $34.30, +1.7%
It was a big day for US manufacturing data as readings on activity in the sector out of both the Institute for Supply Management and Markit Economics beat expectations, though still indicated only lukewarm activity (at best) for US manufacturing.
Markit’s final reading on manufacturing in February hit 51.3, indicating expansion but still, overall, serving as the worst reading in about two years.
“The February data add to signs of distress in the US manufacturing economy,” said Markit’s Chris Williamson.
“With other headwinds including the downturn in the oil sector, heightened uncertainty due to financial market volatility, global growth worries and growing concerns about the presidential election, it’s no surprise that the manufacturing sector is facing its toughest period since the global financial crisis.”
ISM’s measure, meanwhile, showed a continued decline in activity during February with its reading hitting 49.5 — 50 is the breakeven level for expansion and contraction in these surveys — and Ian Shepherdson at Pantheon Macro called this, “not a robust report” adding that he has no “real hopes” of a strong rebound this year.
Manufacturing, both in the US and internationally, has been hammered by a strong US dollar (making cross-currency trade of all kinds more onerous) while the decline in oil prices has also weighed on these readings as oil production falls under the manufacturing umbrella.
Of course, as we’ve noted time and again, manufacturing accounts for about 15% of GDP data. Though of course prolonged weakness in this or really any part of the economy puts the whole thing at risk as layoffs and a loss of confidence from even what is a clear minority of US workers and corporations can ding confidence in the whole economy and send things south.
So, we’re watching it.
Elsewhere in the economy we got auto sales that were solid but not quite as a good as expected with February sales hitting an annualized pace of 17.4 million, according to Ward Auto. Expectations were for this measure to hit 17.7 million.
Construction spending in January rose 1.5% over the prior month, way more than expected.
Recession Watch, 2016
Torsten Sløk is still bullish, highlighting three charts on Tuesday that point towards not only an economy very much not trending towards recession but indicating that the Fed ought to consider raising interest rates at its March meeting.
In an email Tuesday, Neil Dutta at Renaissance Macro followed along this line of thinking, writing (emphasis mine):
It is not secret that I am very sympathetic to [Sløk’s] view. However, the Fed (in its own mind at least) is not data dependent so much as it is outlook dependent. It will probably not be until the June meeting that the Fed determines whether or not the economy was able to shake off the recent tightening of financial conditions. My guess is that conditions will be fine and unemployment somewhat lower than it is at the moment.
That said, I do see a significant risk that the Fed will be forced into the scenario they have said they want to avoid — namely, going more aggressively later on. The recession scenario the market has been pricing is off base: it is not about the US fundamentals or slowing global economy for that matter. That scenario can be mitigated by better data. We may be seeing some of that today. The real recession risk comes later, when the Fed is forced to make up for hikes they took a pass on in 2016.
And that’s really the thing about recessions: they always come at the end of a tightening cycle from the Fed. The whole reason that you raise interest rates as a central bank is to tamp down inflation and cool off an economic cycle you think has gone too far too fast or created too many excesses or something.
The scenario Dutta outlines is one that has been talked about here and there but, for a Fed-watching public that has seen nothing but disappointing inflation readings for years, seems sort of impossible.
I mean, too much inflation for the Fed? Is that possible? Well, it very much seems that way, at least given recent trends. Now, we’re not making a specific call on the future of inflation, but the reality is that so much of what kept the headline numbers down over the last nearly two years was the decline in oil prices — which also kept down the cost of making some goods, keeping even core down in some small way.
All oil needs to do, then, is merely not go down anymore and you’re looking at much higher inflation. If it rises, we’re probably looking at a Fed meeting its target.
And then you get rate hikes.
And then you get recession.
On Monday, shares of Valeant crashed about 18% after a series of bad news came out about the company including reports that it would delay the filing of its annual report with the SEC and that the SEC is investigating the company.
Shares of the company were trading at around $65 a share on Tuesday.
In a note out before the market open on Tuesday, analysts at RBC cut their price target on the company to $100 from $164, a 56% reduction that follows a 70% decline in the stock price over the last six months.
While we believe the company has several high quality businesses, our ability to have high conviction is impaired at present. We had previously highlighted headline risk in Q1 and Q2 of 2016 but expected strengthening operations through the year to lead to multiple expansion later in 2016.
While we still believe operations will improve, especially given the recently announced, unique, Walgreens access program, our lack of visibility on various issues makes it difficult to call for an expansion in the multiple at present. As such, the foundation for our previous Outperform rating no longer applies.
Being an analyst is hard.
Valeant, you’ll recall, is hedge fund giant Bill Ackman’s largest holding.
Also in hedge fund stocks, SunEdison shares fell more than 20% on Tuesday after the company filed to delay its annual report with the SEC.
Summers writes (emphasis mine):
While comparisons between Donald Trump and Mussolini or Hitler are overwrought, Trump’s rise does illustrate how democratic processes can lose their way and turn dangerously toxic when there is intense economic frustration and widespread apprehension about the future. This is especially the case when some previously respected leaders scurry to make peace in a new order — yes Chris Christie, I mean you.
The possible election of Donald Trump as president is the greatest present threat to the prosperity and security of the United States. I have had a strong point of view on each of the last ten presidential elections, but never before had I feared that what I regarded as the wrong outcome would in the long sweep of history risk grave damage to the American project.
Or, as I said in the headline, Summers thinks Trump is what happens when democracy goes awry.
Trump is poised to be a big winner on Super Tuesday and move one step closer to winning the Republican nomination for president.
There was also a “secular stagnation” angle to Summers’ Trump thing (obviously!) which says that since the economy has been so frail and people are so uncertain about the future the only thing people can get behind is the boisterousness of a candidate like Donald Trump who runs not on traditional policy-backed views but simply his bluster.
To Summers, Trump’s rise, “is a reflection of the political psychology of frustration — people see him as responding to their fears about the modern world order, an outsider fighting for those who have been left behind.”