The last two weeks have not been pretty for the ‘it’s different this time’ crowd. Day after day has brough miss after miss in macro-economic data for the US; from PMIs to NFPs, no matter how hard you try, there is not even enough for an ‘anecdotal’ strategist to pin his BTFD thesis on. Quantitatively, the US macro surprise index has seen its biggest 10-day drop in 10 months, completely reversing all the ‘seasonally-adjusted’ difference from the 2011 ‘Deja-Vu’ market and macro behavior. So with the first pillar of bullishness (macro data is ‘supportive’), it is up to earnings (but but but profitability is at highs) to hold up the market – good luck with that.
Biggest 2-week drop in macro data in 10 months…
Signs the economy has entered a soft patch could slow Wall Street’s bull but it may be earnings season that ultimately makes stocks stumble.
First-quarter earnings reports will start to trickle out in the week ahead with just a few blue chip names reporting — Alcoa on Monday, and JP Morgan and Wells Fargo on Friday. There are also some important economic data, particularly retail sales on Friday, which could help show whether tax increases are pinching consumers and give some context to the weaker March economic reports, including Friday’s dismal jobs number.
The addition of just 88,000 nonfarm payrolls in March was a game-changer for the markets, and chatter that the Federal Reserve may be moving to end quantitative easing sooner-than-expected abruptly faded.
Just three months in, and already there is a nagging sense that 2013, like last year and the one before, will produce another disappointing vintage for the world economy.
Japan’s $1.4 trillion monetary barrage stole the show last week, but it was the dismal turn in data from the United States and Europe that brought home how this year is panning out worse than many had hoped.
News that American employers hired far fewer staff in March than even the gloomiest predictions managed to derail the heady rise of stock markets over the last few months.
Fund manager John Hussman of the Hussman Funds sounds the alarm again in his most recent weekly note.
Specifically, he suggests that the economy is much weaker than most people realize and may, in fact, be in a recession.
And then he observes that corporate earnings, which have driven the stock market to a record high (without adjusting for inflation) are based on record-high profit margins that will almost certainly drop.
First, here’s Hussman on the economy:
While there is no shortage of smug observers who believe that recession risk does not exist and never did, the fact is that the strongest leading indicators, as well as the most timely coincident data, have deteriorated and danced along the border between economic expansion and economic recession for more than two years. Meanwhile, repeated rounds of QE have produced little but short-lived bounces to defer a recession that historically would have followed such deterioration more quickly. The chart below offers a good picture of this process.