Market Downturn Continues Amid Mixed Economic Data

by Jon Markman | December 13, 2013 11:15 am

Once again, stocks careened mostly lower on Thursday (and are mixed in early Friday trading), with the biggest stocks in the S&P 500 and Dow Jones Industrials lending most of the dead weight. The small-caps of the Russell 2000 managed to eke out a small gain, while the Nasdaq was virtually flat.

This all seems kind of sudden, as if the market climbed to a peak a week ago and then fell off the other side. But the action is, in fact, exceedingly common. What’s unusual is how little volatility like this we have seen this year.

Three steps forward, two steps back is the market’s basic M.O. since time immemorial. We have become spoiled in the past year, and certainly since October, in that we have not seen a lot of this action as stocks have made a singularly smooth arc higher.

The main point to keep in mind is that pullbacks like the one in progress now are very useful for traders. They push even the most attractive stocks down to compression points from which they can rise dramatically in ensuing days and weeks. It’s as if an invisible hand is pushing down a spring-loaded toy, such as a jack-in-the-box. Now we just have to wait patiently for the hand to pull away and let the stocks spring higher. When it does, I have a long list of new recommendations ready to go that will react extremely well, both in options and in common stocks.

The news today did not provide much insight. Strong retail sales in the month of November added to a recent string of positive economic data, which has heightened speculation that the Fed could taper asset purchases possibly as early as next week. However, consensus is still for tapering to start sometime early next year. My guess is that it will be later rather than earlier, e.g. March.

New data showed that retail sales rose 0.7% from a month earlier, the sharpest increase since June, and 4.7% from the same period last year. Auto sales continued their upward march to a six-year high. The Commerce Department also revised October’s sales to a 0.6% gain from a 0.4% gain.

However, jobless claims painted a different picture for the economy, as initial claims rose much more than expected after falling to a two-month low under 300,000 last week. Claims rose 68,000 to 368,000 versus expectations for a rise to 326,000. That was the biggest jump in more than a year. Don’t assign much weight to a single report; jobs have mostly been stronger of late.

The October business inventories report was the other notable piece of economic data today. Inventories rose 0.7% in October, coming in above expectations for a 0.3% build. It was the largest increase in nine months, and followed September’s 0.6% increase. Rising inventories tend to be a negative, as they mean that sales are now matching manufacturing expectations. We’ll watch this one.


Looking farther afield, global growth expectations have picked up recently, with some economists expecting 2014 to be the strongest year for the global economy since 2010. A recent string of encouraging economic data and various potential catalysts has led more economists to forecast that the U.S. economy could finally reach escape velocity next year, allowing the Fed to cut back on its asset purchases. Stronger growth from abroad could also help the Fed pull back. Treasury Secretary Jack Lew said today that the eurozone’s prolonged recession appeared to be ending, although policymakers in the region can do more to boost employment.

The other area of focus is China, where expectations are rising that policymakers could lower their growth target for next year in order to successfully implement their broad reform agenda. A few influential think tanks have recommended that Communist Party of China leaders will lower their 2014 GDP growth target to 7%.

Lower growth for China will be a plus for the United States, in that there will be lower demand for raw materials such as steel and cement, and that will help keep inflation pressures low. As long as inflation remains tame in the United States, price/earnings multiples will keep rising even if growth is on the weaker side at 2% to 3% annualized.

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