This week includes a GDP report, a jobs report, and a
speaking engagement with Federal Reserve Chairman Ben Bernanke.
Here’s your Monday Scouting Report:
The Stock Market Is In A Bubble: That’s what increasing numbers of market watchers are warning. And many of them point to the cyclically-adjusted price-earnings (CAPE) ratio, which is considerably higher than its long-term average.
“There are a number of reasons that investors should be careful relying solely on one valuation model to determine whether the equity market is under or overvalued,” cautioned Jefferies’ Sean Darby. Defending the stock market, Darby noted that S&P 500 profits are skewed in the index, large cash holdings justify a higher price-earnings multiple, stocks don’t have to fall for CAPE to correct, and other measures of profit appear reasonable.
- Factory Orders (Monday): Economists estimate that orders climbed 0.3% in August and 1.8% in September. The August number is coming now because it was delayed by the government shutdown. “We expect factory orders to increase by 1.7% in September, with a modest gain in non-durable orders adding to the 3.7% jump in durable orders (as reported in the preliminary release),” said Barclays’ U.S. economics team.
- ISM Non-Manufacturing Index (Tuesday): Economists estimate that the ISM services index slipped to 54.0 in October from 54.4 in September. “This would mark the second straight month of declining service sector activity,” noted Bank of America Merrill Lynch’s U.S. economics team. “In August, the index hit the highest level since March 2006 at 58.6 before falling to 54.4 in September. The new orders index in September was strong but we believe that the government shutdown weighed on service sector activity in October.”
- Initial Unemployment Claims (Thursday): Economists estimate jobless claims fell to 335,000 from 340,000 a week ago. “[W]e posit that we are now past a series of special factors (CA and NV computer upgrades, partial federal government shutdown) that dampened and then inflated the data over the last two months,” said Citi’s Peter D’Antonio. “However, the four-week moving average will continue to be influenced by those factors for a few more weeks to come. Separately, beneficiaries rose a second week and the insured rate held at 2.2%. Though remarkably stable since August, we think that both figures have been dampened somewhat by the California claims backlog.”
- Q3 GDP (Thursday): Economists estimate that the advanced reading of Q3 GDP growth was 2.0%, down from 2.5% in Q2, largely driven by a 1.6% gain in personal consumption. “The expected poor performance is likely from weaker business investment and the continuation of fiscal drag,” said Wells Fargo’s John Silvia. “However, with the smaller-than-expected budget deficit, we expect that the public sector decline was smaller than previously forecasted. Slower employment gains have likely kept personal consumption growth subdued, and a narrower trade deficit should add just a tenth to the headline number.”
- Consumer Credit (Thursday): Economists estimate credit balances increased by $US12.1 billion in September. “In our view, growth in federal student loans has been largely responsible for the recent increases in consumer credit,” said Barclays. “We expect this trend to continue in September and look for an expansion of $US15.0bn on the month. This would be driven by a roughly $US12.0bn rise in the nonrevolving component and a $US3.0bn rebound in the revolving component following declines in the past three months.”
- Employment (Friday): Economists estimate nonfarm payrolls climbed by just 125,000 in October, up from 148,000 in September. The unemployment rate is expected to have climbed to 7.3% from 7.2%. “The BLS has indicated that although government workers were not at work during the survey period, because they received back pay they will be counted in the establishment survey — i.e. the nonfarm payroll count,” said Deutsche Bank’s Brett Ryan. “However, temporarily furloughed workers will be classified as unemployed in the household survey; hence, there will be a one-time impact on the unemployment rate, but not on the labour force participation rate.”
- Personal Income And Outlays (Friday): Economists estimate income climbed 0.3% while spending increased by 0.2%. “The employment report showed a modest 0.3% gain in aggregate private sector wages, but overall personal income should get a bit of an additional boost from gains in farm profits, dividends, and rental income,” said Morgan Stanley’s Ted Wieseman. “Meanwhile, auto sales pulled back in September, but the core retail control gauge posted a solid 0.5% gain, and a rebound in utility demand should support a better result for services consumption, so we look for a solid rise in personal spending.”
- Consumer Sentiment (Friday): Economists estimate that the University of Michigan’s measure of sentiment improved to 75.0 from 73.2 last month. “Bad news on government, which hit an all-time record in October, should begin to fade in November,” said Credit Suisse’s Isaac Lebwohl. “Movements in this subcomponent of the news heard index have correlated closely to the headline number this year. Record highs in the stock market and falling gasoline prices also should help put a floor under sentiment.”
The stock market remains near all-time highs. But what could trigger a sell-off?
Here’s Credit Suisse’s Andrew Garthwaite: “Overall, we continue to believe that equities would have a meaningful correction (i.e. 10% or more) only after one of the following events occurs: (1) There is a clear monetary shock with interest rates rising: we think this is likely to be a mid-2015 event in the US; (2) Equities become clearly expensive against bonds (i.e. the US 10-year bond yield rises above 3.5%); (3) Risk appetite indicators hit euphoria; (4) A global macro shock (the most likely candidates being a sharper-than-expected slowdown in China or political shocks in peripheral Europe).”
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