Despite what has been a bright US economic picture, US stocks have been tumbling.
At least some of the selling can be attributed to the significant overseas exposure of the publicly traded US companies.
Last week’s stock market sell-off put the Dow Jones Industrial Average in the red for the year.
This week comes with some telling economic reports from the US and abroad. We’ll also be hearing from more Fed officials including Fed Chair Janet Yellen, who’ll speak on Friday at 8:30 a.m. in Boston.
Here’s your Monday Scouting Report:
What’s With The Sell-Off?: “I could give you any one of several answers but they won’t actually help you,” Joshua Brown wrote. “Because this is the wrong question.”
“The right question is to ask why it went up an almost equivalent amount yesterday. And the answer to that is people are out of their f***ing minds. They’re nostalgic for the sentiment-driven, Fed-fuelled, multiple expansion market of 2013 and they haven’t yet accepted the fact it was a once (maybe twice) in a lifetime thing.”
Brown argues that many of the forces that drove prices up in recent years are either “non-existent or on the wane.” He identified five themes: “investors are no longer underinvested in stocks,” “the Fed is walking away,” “Sentiment from week to week has been volatile but the big picture is that people are back in again,” “US companies are not smashing anything,” and “the rest of the world is not only not improving, it’s becoming a disaster.”
- Bond markets are closed Monday for Columbus Day Holiday.
- Monthly Budget Statement (Tues): Economists estimate the US had a budget surplus of $US82.6 billion in September.
- Empire Manufacturing (Wed): Economists estimate this regional manufacturing index fell to 20.9 in October from 27.54 in September. “After an exaggerated surge in September, we forecast a partial reversal for the current activity index in October. Details of the report did not show as much strength as the headline in September: the shipments index rose much less and our ISM-equivalent Empire State index only inched up to 53.4 from 53.2,” UBS’s Sam Coffin said.
- Retail Sales (Wed): Economists estimated sales fell 0.1% month-over-month in October. Excluding autos and gas, sales are expected to have jumped by 0.4%. “Unit motor vehicle sales fell 6% in September to a 16.3 million unit annual rate, reversing a 6% gain in August to an eight-year high of 17.45 million,” Morgan Stanley’s Ted Wieseman noted. “The pullback appears to have partly reflected lower fleet sales to businesses, but there is still likely to be a significant drag on headline retail sales. Ex auto sales meanwhile, should receive a boost from IPhone sales, supporting strong growth in the electronics and appliances stores and non-store (internet only retailers mainly) categories. But IPhone sales may have diverted spending from clothing and other mall retailers as the back-to-school shopping period was wrapping up according to our retail team in equity research.”
- PPI (Wed): Economists estimate producer prices climbed 0.1% month-over-month in September or 1.8% year-over-year. Excluding food and energy, they estimate prices climbed by 0.1% and 1.7%, respectively. “Farm and energy prices declined in September and should exert downward pressure on headline PPI,” Nomura economists said.
- Beige Book (Wed): The Federal Reserve will publish this collection of regional economic anecdotes at 2:00 p.m. ET. Here’s Credit Suisse: “Markets will be looking to next week’s Beige Book for anecdotes regarding labour market dynamics and the prospects for wage increases. Also, any observations regarding the effect of the global economic slowdown on domestic businesses would be met with particular interest. The previous Beige Book, released September 3, cited continued expansion across the country, although “none of the Districts pointed to a distinct shift in the overall pace of growth.””
- Initial Jobless Claims (Thurs): Economists estimate weekly claims climbed to 290,000 from 287,000 a week ago. “It is rare for new jobless claims to maintain a pace below 300k for long — a signal of a still-strengthening labour market,” UBS’s Coffin said. “At 288k in the latest week, the four-week average was down from 304k a month earlier. We forecast little change in claims in the upcoming week.”
- Industrial Production (Thurs): Economists estimate production increased by 0.4% in September as capacity utilization increased to 79.0%. “Based on the robust improvement in aggregate hours worked in manufacturing and mining in September, we forecast a rise in both manufacturing production (excluding vehicles) and mining production,” Nomura economists said. “Based on weekly utility output data, we expect utilities production to increase for a second month, but we expect vehicle production to decline again in September after surging in July.”
- Philadelphia Fed Business Outlook (Thurs): Economists estimate this regional activity index fell to 20.0 in October from 22.5 in September. “After exaggerated strength in August, the Philadelphia Fed survey indicated slightly slower, but still healthy, growth in September,” UBS’s Coffin said. “We forecast further, very slight, slowing in October.”
- NAHB Housing Market Index (Thurs): Economists estimate this homebuilder sentiment index was unchanged at 59 in October. “New home sales surged 18% in August, which helps explain the rise in confidence in September,” said Bank of America Merrill Lynch economists who expect a 58 level. “However, we don’t think such strong pace of growth is persistent.”
- Housing Starts (Fri): Economists estimate the pace of housing starts jumped 5.1% to 1.005 million units in September as permits climbed 2.7% to 1.03 million. “The NAHB homebuilder survey was exceptionally strong in September while new home sales surged higher in August,” Bank of America Merrill Lynch economists noted. “Looking ahead, we expect to continue to trend higher, leaving the average for the year at 1.003 million, up just over 10% from last year. While construction has turned higher this year, the growth rate has slowed and was disappointing relative to consensus expectations.”
- Univ. Of Michigan Confidence (Fri): Economists estimate this index of consumer sentiment fell to 84.1 in October from 84.6 a month ago. “Our best guess is that sentiment will remain muted as lower stock prices may offset some of the positive momentum from declining energy costs and a stronger labour market,” Deutsche Bank economists said.
Wall Street’s equity strategists are split about the current volatility in the markets. Those like Fundstrat’s Tom Lee who focus on fundamentals think this is just a blip in an ongoing bull market.
Deutsche Bank’s David Bianco notes that sell-offs are pretty typical ahead of mid-term elections, and we’ve got one coming up on November 4. Here’s Bianco: “On average, the S&P suffered a 12% decline in the 6 months leading to the election and then rallied 25% trough to peak in the 6 months after the election or a 10% gain from prior peak. Elections are important, but performance around past mid-terms was influenced by other factors. The S&P suffered a correction in 7 of the 15 mid-term elections since 1954, all of which were related to recessions (1962, 1974, 1990, 2002) or aggressive Fed tightening (1966, 1978) or foreign strains (1998). Ex these 7, the average S&P sell-off was under 5%.”
For more insight about the middle market, visit mid-marketpulse.com.