by Dan Wiener | December 5, 2013 4:57 pm
We’ve been getting a ton of mixed signals in economic data over the past several days. Take consumer spending during the first official weekend of holiday shopping — we probably didn’t get a clear picture of just how well, or poorly things went last week. Some consumer spending surveys suggested the consumer was out in force, but wasn’t spending. Other economic data said the consumer was spending well, and still others showed that Internet sales, or e-tail was really where the growth was. In other words, there are many ways to measure what’s happening at the consumer spending level.
But maybe just as important to consider this year — making comparisons with 2012 when Hanukah didn’t fall on Thanksgiving, SuperStorm Sandy had just occurred, and there was almost an additional week of shopping between the holidays is almost nonsensical.
More mixed signals in economic data: Today’s second estimate on ‘Q3 GDP saw a big jump in the headline number with growth of 3.6%, up from the first estimate of 2.8%. But the mixed signal is that a large portion of that growth was inventories. Are businesses building up inventories with expectations of greater sales ahead, or did they miss a slowdown? It’s still too early to tell.
What wasn’t jumbled in the report was the fact that corporate profits continue to move higher. On an after-tax basis profits were up 2.6% during the quarter and are up 8.8% above year-ago numbers. Yes, the gap between the earnings yield on the market and the yield on the 10-Year Treasury (TNX) has come in a bit but it’s still very high making stocks the go-to asset for investors like us. Now, if we could see some better growth in sales to go along with the cost-cutting that is yielding that higher net income I’d really be happy.
The ISM manufacturing survey showed robust improvement in November which clashed with some other data that is less bullish, leaving things more than inconclusive on where the manufacturing sector is going. That said, the ISM survey is more of a sentiment survey and would suggest that sentiment is improving ahead of actual work being done. Maybe.
And the ISM service economy index dropped more than had been expected but this number has been very choppy over the past several months, up about 12% over two months, then down 7% then up 1% then down a bit less than 3%.
The employment portion of that survey is even wilder with swings up 9.2%, down 2.7%, up 7.1%, down 7.5%, up 6.6% and then down 6.6%. It’s hard to make heads or tails out of this. Remember that, remaining well above 50 it still indicates expansion, just a slower expansion than we’ve seen in some other months.
The new home sales data from the Census Bureau finally was released, and there were two months’ worth reported — both September and October. The revisions to prior months took numbers down but October looked very strong, particularly compared to October a year ago, up 21.6%. Inventories are coming back down. But prices remain pretty flat, having fallen recently to slightly below year-ago median prices. I assume builders are trying to keep homes in the affordable range now that mortgage rates have risen. Again, mixed signals.
The Dow has fallen four days in a row since hitting an all-time high on Nov. 27, the day before Thanksgiving and we’re heading towards a fifth down day. But the declines have been tiny. That said, I’m surprised the media hasn’t already focused on the last time an all-time high was followed by four or more down days. It happened in Sept. when, after a new high was set on Sept. 18 the Dow dropped for five days straight, took a breather and then fell some more. The total tumble was 5.7% by Oct. 8 which was, as you might remember, during the government shutdown. Then the market rebounded to start hitting new highs all over again.
The Wall Street Journal reports today that AllianceBernstein’s Seth Masters is calling for a 20,000 Dow by 2018. So what! That would mean an annualized return of between 4.6% and 5.8% depending on whether we’re talking about Jan. 1, 2018 or Dec. 31, 2018. Either way, that’s half or less the long-run, 5-year average return for stocks of 10.0%. Masters may be a master at getting ink, but his prediction is anything but masterful.
Senior Editor Dan Wiener and Editor/Research Director Jeffrey DeMaso publish The Independent Adviser for Vanguard Investors, a monthly newsletter that keeps abreast of recent developments at Vanguard, and the annual FFSA Independent Guide to the Vanguard Funds.
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