2 May 2005
The past week's economic news can probably be better described as bad rather than good. However, whether this is just a soft patch or whether it is pointing towards further deterioration in the economy remains a matter of much debate among economists, and investors and investment analysts appear to be as divided as economists.
While the past week has seen some sprinkling of positive news on the economic front, it is probably fair to say that the negative news has dominated, even from the usually-resilient United States economy.
The week started off encouragingly, with Monday's report of a rise in existing home sales in the US in March being followed the next day by a report of a surge in new homes sales in March to record levels. Wednesday, however, saw a 2.8 percent plunge in reported durable goods orders in March, the biggest drop since September 2002. This was followed on Thursday by news that first quarter US GDP growth was 3.1 percent, substantially down from 3.8 percent in the fourth quarter. Higher inflation, rising inventories and slowing business investment were the highlights of the GDP report.
Friday did see news of personal income and spending continuing their ascent in March -- by 0.5 percent and 0.6 percent respectively. However, a rise in the personal consumption expenditures price index by 0.5 percent negated much of the increases, while the saving rate continues to fall.
Forward indicators are also worrisome. The Conference Board's consumer confidence index for April fell to 97.7 from 103.0 in March, while the University of Michigan's measure of consumer sentiment in April fell to 87.7 from 92.6 in March. Manufacturing outlook moderated, with the National Association of Purchasing Management-Chicago's index slipping in April to 65.6 from 69.2.
It was little better in the rest of the world.
In Germany, the Ifo business climate index fell to 93.3, the third drop in a row, from 94.0 in March. A consortium of German think-tanks, in a report last week, cut its forecast for German growth this year from 1.5 percent to 0.7 percent, while the German government cut its forecast to 1.0 percent from 1.6 percent previously.
In Japan, household spending and jobs both fell in March compared to February, although the economy saw some reprieve in its often-disappointing core consumer price trend, which rose 0.3 percent in March. Japan's industrial production fell unexpectedly by 0.3 percent in March, but the NTC Research/Nomura/JMMA Purchasing Managers Index (PMI) rose to 53.3 in April, its highest reading in seven months.
Despite the generally deteriorating data, there is no consensus on the outlook. Many economists, including Federal Reserve chairman Alan Greenspan, think that the US economy is experiencing a soft patch, implying a re-acceleration in the near future. Others are less sanguine.
In a Bloomberg commentary on 29 April, Caroline Baum -- citing John Silvia, chief economist at Wachovia Corp, who said that the "soft patch" is "a non-starter as a concept" -- expressed skepticism of a re-acceleration. "The business cycle is maturing," she wrote. "The economy doesn't slow down and re-accelerate on its own... Rather, something exogenous needs to happen to cause the economy to reaccelerate."
Morgan Stanley's Richard Berner is more hopeful. In a commentary on 29 April in the Global Economic Forum, he wrote that falls in gasoline and other energy prices may "unmask pent-up demand for capital spending and hiring again".
Berner is also sanguine about the rise in inventories reported in the GDP report. He wrote: "With our industry analysts reporting that end-market corporate demand for personal computers, machinery, and industrial equipment appears to have strengthened in April, it seems likely that any inventory correction will be extremely short-lived."
However, John Hussman of the Hussman Funds, in a 25 April note, looks at the wider context and warns against expecting too much from capital investment: "There is very little in the way of new large-scale technologies that would pace a capital spending boom... we've observed a number of periods of booming investment and growth-pacing technological innovation over the past century. This isn't one of them by a long-shot."
If the economic news can be characterised as bad, it is probably safe to say that much of it has been anticipated by investors.
In his MarketWatch column on 28 April, Mark Hulbert wrote that the Hulbert Stock Newsletter Sentiment Index (HSNSI), which reflects the average stock market exposure among short-term market timing newsletters tracked by the Hulbert Financial Digest, stood at negative 24.4 percent. This means that the average short-term market timer is short the stock market. According to Hulbert: "There has been only one other period since the bear market began in March 2000 in which the HSNSI was any lower. And that was last week, when it dipped to negative 30.6%."
Hulbert also pointed out that according to Investors Intelligence, 44.0 percent of newsletters they monitor are bullish and 29.7 percent are bearish. This is a relatively small margin between bullish and bearish newsletters, implying a relatively bearish outlook, but Hulbert also adds: "Because the average bearish percentage in rising markets is 35%, [editor Michael] Burke suspects there may still be too much optimism among investment advisors."
And Hulbert points out in his column the next day that among the top five short-term market timing newsletters he monitors, "three...are bullish, one is more or less neutral, and the fifth is bearish. That overall works out to a bullish consensus."
So the lack of consensus among economists is mirrored by investors.
And according to SmartMoney, some of the usually-bearish analysts that it regularly follows have also been ambivalent of late.
Bank of America Securities' Thomas McManus reportedly wrote in an 18 April note that while "we still recommend below-average equity exposure...near-term risks may be overstated". And in a 29 April note, he wrote that it is "past time for us to begin the process of sifting through the carnage to look for bargains".
In a note on 15 April, Merrill Lynch's Richard Bernstein reportedly wrote that "the yield curve has become flatter than normal" but "[i]mportantly, the curve is not inverted", indicating that a recession is not imminent.
This is a highly ambivalent market. Investors with a contrarian instinct will have to dig a little harder to find any misconceived consensus to bet against.
Disclaimer: The commentaries posted here represent the opinions of the author at the time of posting and should not be taken as investment advice. Readers who wish to take any investment action based on information obtained from this site should seek appropriate advice from a qualified financial adviser.