By William Patalon III
Money Morning/The Money Map Report
Investors are being flooded with economic reports, many of them contradictory in nature. From that confusing gaggle, two indicators hint at an upbeat outcome:
- The torrid stock-market rally that’s been dominating headlines in recent weeks.
- And so-called “first-time jobless claims.”
Let’s look at stock prices, first.
Is The Rally For Real?
Many of the indicators from recent reports are known as “lagging indicators,” because they are snapshots of the past. That’s true of unemployment, retail sales, gross domestic product (GDP), and most others. But the stock market is “forward-looking,” meaning it tends to factor in expectations about future corporate earnings, income growth, inflation, unemployment and economic output. The unprecedented rally in U.S. stock prices hints at much better times to come.
Well, for many, that time may be now. Some favorable corporate reports combined with stronger than expected labor releases (see below) to keep the equity rally alive (and well) and the markets on a nice upward trend. The week started and ended on high notes as both the Dow Jones Industrial Average traded at its highest level since November, while the Standard & Poor’s 500 Index moved to levels not seen since October. The Nasdaq Composite Index continued to lead the surge on a year-to-date basis. All three indexes closed in positive territory for the fourth week in a row.
From its early March low of 676.53, the S&P 500 has soared more than 333 points, or 49%, closing Friday at 1,010.48. The Dow is up 43%. The tech-laden Nasdaq is up a scorching 58%.
On Thursday, during an interview on cable’s popular financial channel, CNBC, Goldman Sachs Group Inc. (NYSE: GS) celebrity market strategist Abby Joseph Cohen said the S&P 500 Index may rise as high as 1,100 this year, although she warned the move to the top could be rocky.
"We do think that's achievable, but it doesn't mean we get there in a straight shot," Cohen told CNBC. Added Cohen:"Even if this is the new bull market, don't expect it to look like a 'V.' Expect it to look like a series of upward steps."
According to a forecast put together by the Goldman strategy team, the S&P 500 should trade in a range of 1,050 to 1,100 toward the end of this year. After bouncing back so strongly from its March lows, the S&P 500 is up 12% so far this year.
From Friday’s close of 1,010.48, a run to 1,100 would represent a gain of about 9%. The S&P gained 1.3% Friday.
Cohen – one of Wall Street's true bulls – gained, according to a New York Times report.
"We do think the new bull market has begun," Cohen told her interviewers. "It may prove that it began in March. Clearly many people were looking for better signs on the economy, and now we're getting them."
Rebounding corporate profits will be the key catalyst, according to Cohen. She said earnings of $75 a share for the S&P 500 next year are "reasonable" and that the S&P 500 at 1,050 would mean the closely watched index is trading at a Price/Earnings (P/E) ratio of 14.
A secondary – but also important – catalyst will be improvements in such key parts of the U.S. economy as jobs and business inventories. Going forward, unemployment – like the stock market – will improve in an erratic manner. The U.S. Labor Department Thursday said jobless claims dropped by 38,000 in the most-recent week, a to a seasonally adjusted 550,000. As we’ll see in a moment, this was an important development.
“We are beginning to see improvement even in the labor market, where it appears that the job losses are slowing and there is some job creation going on,” Cohen said. “But let's keep in mind that labor markets are unlikely to turn all at once or on a dime. We have many more months of difficult labor situation ahead even if the recession ... is almost over.”
Armed with this information, where should investors be looking? Stocks will perform better than bonds, Cohen said. And within the stock market, Cohen said she favors cyclical sectors such as energy, technology and financials.
Of the two indicators we’re highlighting – the stock market and first-time jobless claims – we’ve now examined the market rebound.
So let’s turn our attention to first-time jobless claims.
These Stats “Claim” the Recesson is Ending
“For the last couple of weeks, we have been highlighting how the recent trends in initial jobless claims suggest that the recession is over or winding down,” said a research report released a week ago by Bespoke Investment Group LLC. “However, there remains a considerable amount of skepticism towards the market’s rally. Critics contend that any meaningful rally cannot occur until the economy improves. With jobless claims still at high levels, they claim we have not reached that point.”
But initial claims don’t support that contention. Since peaking in April, the four-week moving average of initial jobless claims has dropped more than 15%. That’s actually a bigger decline in jobless claims during a recession than in any of the other six economic downturns recorded since 1969.
In other words, in the other downturns, Bespoke measured the percentage decline in the four-week moving average of initial jobless claims from their peak until the recession officially ended. That hints strongly that the current recession is over - or at the very least is at or near its end, Bespoke said.
That picture only got brighter on Thursday and Friday.
On Friday the Labor Department said the nation’s unemployment rate fell to 9.4% in July from 9.5% in June, and the payroll release showed that a lower-than-anticipated 247,000 jobs were lost in July.
Even more key was Thursday’s Labor Department announcement that said that first-time filings for state unemployment benefits declined by 38,000 the week before, reaching a seasonally adjusted 550,000. As we showed Money Morning readers last week, it’s this initial-jobless-claims statistic that’s a key indicator to watch in attempting to determine when a recession will end.
Economists surveyed by MarketWatch.com had expected initial claims to fall to around 580,000. And the four-week average of new claims dropped to 555,250 – the lowest level since January.
Compared with a year earlier, initial claims were up 22%, while continuing claims were up 89%. Compared with six months ago, initial claims have fallen 12% while continuing claims are up 33%.
In an interview on CNBC early Thursday morning, one trader looked at the first-time-jobless claims numbers and concluded: “The recession’s over.”
Amid all the bailout programs (TARP, TALF, etc.), the non-alphabet one with the funny name is among the most effective. So-called “Cash for Clunkers” got new life as Congress voted an additional $2 billion in the form of rebates for individuals who trade in their gas-guzzling heavy iron for newer, energy-efficient autos.
While Republicans initially tried to resist giving any credit, the Senate offered its blessing on the program that has prompted cars to burn rubber as they zoom off U.S. car lots, and to have previously deserted showrooms now contributing to the rebirth of the domestic U.S. auto industry.
In less-encouraging bailout news, the U.S. Treasury Department reported that the $75 billion loan modification program has been underwhelming as Bank of America Corp. (NYSE: BAC) and Wells Fargo & Co. (NYSE: WFC) – among others – have been very slow to rework deals with eligible borrowers and foreclosures continue to rise.
Earnings season moved forward and investors have continued to like what they see. Consistent with their domestic counterparts, British banks HSBC Holdings PLC (NYSE ADR: HBC) and Barclays PLC (NYSE ADR: BCS) both posted favorable quarterly results.
Kraft Foods Inc. (NYSE: KFT) reaped the benefit of more folks dining in these days (hard to beat that mac and cheese) and even Whole Foods (NASDAQ:WFMI) bested expectations on enhanced margins from cost-cutting measures. Cisco Systems (NASDAQ: CSCO) reported declining revenues, though management sees some nice trends in IT developing for the quarters to follow. American International Group Inc. (NYSE: AIG), the poster child for greed-induced bailouts (over $180 billion in government aid) actually posted its first profitable quarter since 2007 (new bonuses all around?), though its CEO warned about ongoing restructuring charges. The Blackstone Group LP (NYSE: BX) experienced a favorable quarter as well, an optimistic sign for private equity. Fannie Mae (NYSE:FNM), on the other hand, looked for more government handouts after another poor quarter.
Meanwhile Goldman Sachs Group Inc. (NYSE: GS), coming off its best quarter in its 140-year history (not bad for recessionary times), became subject of a government investigation over trading and compensation issues. Away from financials, Caterpillar Inc. (NYSE: CAT) offered an encouraging assessment of the economy and predicted enhanced biz as the construction and mining industries move into recovery mode. Finally, Ford Motor Co.’s (NYSE: F) sales in July climbed for the first time in 20-months as the company took advantage of its rivals’ misfortunes and also benefited from the Cash for Clunkers program.
While some investors previously had started to stick their toes slowly back into the equity pool, others now seem more inclined to dive back in. For months, analysts talked about the massive amount of cash on the sidelines as investors waited for the right time to undertake more risk in their portfolios.
Bonds gave back considerable ground as investors sold out of the safe-haven securities in favor of stocks. Still, the U.S. Treasury Department announced that government borrowing needs may be reduced as the economy begins to improve (and major banks paid off TARP loans). Want to celebrate the equity rally? Trade in that Clunker for cash.
Year Close (2008)
Qtr Close (06/30/09)
|Dow Jones Industrial|
|10 yr Treasury (Yield)|
While economists welcomed news from manufacturing, services, retail, and housing, most waited patiently for the late-week unemployment data as the best indicators of the state of the recession.
Earlier last week, the private ADP/Macroeconomic Advisers jobs report pointed to a better showing within labor, but the real proof came Friday when the unemployment rate fell to 9.4% (from 9.5%) and the payroll release showed that a lower than anticipated 247,000 jobs were lost in July.
While those 247,000 folks take no comfort in the numbers, investors, analysts, and the Obama administration collectively jumped for joy over signs that the labor picture might be stabilizing.
The rest of the economic news was not half bad, either. Construction spending in June jumped for the second straight month as both residential and government activity increased. Pending home sales climbed for the fifth consecutive month in June as the housing sector appeared to have hit rock bottom (though the recovery road ahead may be slow to develop). The manufacturing sector inched closer to expansion mode as the Institute for Supply Management Index barely remained below the levels that indicate growth. Likewise, factory orders in June rose unexpectedly, another positive sign for the sector.
The news from retail was a bit less positive as consumers seem to be holding off on buying all but the necessities of life until the labor situation begins to improve (and one month will not make a trend).
Same-store sales in July were the most dismal since January and hopeful prospects for a flurry of “back-to-school” purchases seem unlikely to develop. In the aggregate (of those 30 stores that reported), sales plunged over five percent and even discounters like Costco Wholesale Corp. (NASDAQ: COST) and Target Corp. (NYSE: TGT) fell below expectations. Some retailers even blamed the Cash for Clunkers program (see above), claiming that some of those discretionary moneys may have gone to them instead of the automakers. Still, The Gap Inc. (NYSE: GPS), Limited Brands Inc. (NYSE: LTD), and The TJX Cos. Inc. (NYSE: TJX) were among those stores that experienced better-than-anticipated showings and pop-culture-retailer Hot Topic Inc. (Nasdaq: HOTT) benefited from increased sales of Michael Jackson merchandise (and maybe a few Farrah posters as well).
As the summer winds down, back-to-school shopping should pick up and some sales-tax holidays across the country (in 13 states) may be just the incentive needed to bring more buyers to the malls. Despite the weak retail numbers for July, many analysts are hoping for a pick-up in activity as the recent unemployment data was reported as stronger than expected and stores may benefit from some last-minute shopping.
On a related note, consumer activity stays in the limelight as Macy’s Inc. (NYSE: M), Nordstrom Inc. (NYSE: JWN), J.C. Penney Co. Inc. (NYSE: JCP), and Wal-Mart Stores Inc. (NYSE: WMT) highlight the next round of earnings reports with the latter’s announcement most compelling since it no longer participates in the same-store sales monthly surveys.
Retail sales for July will be reported in what may otherwise be considered a relatively light week on the economic calendar (the consumer price index, or CPI, comes out, as well) as the consumer picture becomes even more clear.
Analysts were almost universally upbeat by the end of the week. But a Money Morning Analysis demonstrated that there’s still room for a double-dip recession.
So much for the dog days of summer.
Weekly Economic Calendar
|August 3||Construction Spending (06/09)||Surprising increase for 2nd out of 3 months|
|ISM – Manu (07/09)||Contraction, but best showing since August 2008|
|August 4||Personal Income/Spending (06/09)||Biggest decline in income in over 4 years|
|August 5||Factory Orders (06/09)||Third consecutive increase in orders|
|ISM – Services (07/09)||Surprising decline after 4 straight increasing months|
|August 6||Initial Jobless Claims (08/01)||4 week average at lowest level since late January|
|August 7||Unemployment Rate (07/09)||Unexpectedly fell to 9.4%|
|Non-farm Payroll (07/09)||Smallest jobs contraction since August 2008|
|Consumer Credit (06/09)||5th straight month of declining credit (borrowing)|
|The Week Ahead|
|August 12||Balance of Trade (06/09)|
|August 13||Initial Jobless Claims (08/08)|
|Retail Sales (07/09)|
|August 14||CPI (07/09)|
|Industrial Production (07/09)|
[Editor’s Note: As this analysis of two key economic indicators demonstrates, the investing game is trickier than ever.
But don’t let that reality scare you way. The flip side is that the global economic recovery will create an estimated $300 trillion worth of global-investing-profit opportunities. To find out how to capitalize and profit, you just need to know where to look.
And for that, you need a guide. In a free Money Morning Webinar this week, Investment Director Keith Fitz-Gerald will detail the “$300 trillion global recovery” that will create some of the most profitable investment opportunities that we’ll see in our lifetime. Fitz-Gerald will outline this opportunity, as well as some specific companies global investors might want to consider. To find out more about this free Webinar, please click here.]
News and Related Story Links:
- Money Morning News:
- Money Morning News Analysis:
Hot Stats: The One Jobless Indicator That Hints at the End of the U.S. Recession.
Jobless claims drop 38,000 to 550,000
- Money Morning News Analysis:
With U.S. Consumers Now Uncertain and Unemployed, is Hope for a Quick Rebound Fading Away?
- The New York Times:
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.