The past week was one of those weeks where people who casually follow markets might say, ”Oh that’s nice, stocks were up a little bit this week.” However, for those of us that work in them daily, this was a week where both bulls and bears went from feelings of rage to those of elation. Wednesday was the turnaround point for the week when the S&P 500 broke below 1900 in the morning only to go on a monumental, if not miraculous (for some) rally running 38 points off the lows to close at 1929. Considering all the recession talk lately, 1929 is a rather fitting number to have closed on since that’s the year the U.S. entered the Great Depression. Also playing into the recession narrative on Wednesday was the Markit Flash Services PMI that dropped into contractionary territory going from 53.2 to 49.8 (more on that later). The Markit release was at 9:45 am when things were looking rather bleak. Then at 10:30am, we got an EIA report that showed stronger than expected gasoline demand which turned everything around. As we’ve seen time and time again, this market takes its orders from oil, and when oil turned around and ran higher, it took stocks right along with it. Hey, a rally is still a rally.
The EIA report is especially interesting because it lends itself to the fact that Americans have been driving record amounts. In fact, the Federal Highway Association just released a report showing that December alone set a record for the most miles traveled in a month while 2015 was the highest driving mileage year on record (going back to 1990). Clearly, that’s a manifestation of consumers taking advantage of lower gas prices. Unless you think people are just driving around in circles the whole time, all those miles are being driven for a reason. Whether it’s work, for a trip to an out of the way restaurant or to go see some relatives, it’s all a form of consumption. Which brings me to my next topic, the excellent PCE data we got.
On Friday, we got January PCE readings which showed a very healthy .5% monthly gain in both income and consumption. The prior six months had run at just .3% and .2% average monthly gains respectively for the two series. Also in the report was the Feds preferred inflation gauge, core PCE, which rose .2% to 1.7% year over year. This jump in inflation is just another reflection of strong demand across goods and services. The main story driving this data is that a strong labor market coupled with the extra disposable income from low gas prices is giving people additional means to consume. Just this past week, we saw fantastic earnings from the likes of Home Depot, Target, TJX and Foot Locker. Clearly HD is benefiting from the strength in housing as evidenced by the strong existing home sales (EHS) print we got on Tuesday. EHS, which account for roughly 90% of total home sales, are also running at a six month high. Then we have TGT, TJX, and FL all showing that consumption is strong outside of the housing market as well.
Unfortunately, we did get some weak readings this week from the Markit Flash Services PMI and the Conference Board Consumer Confidence Index . These two reports are also known as “soft” data points. “Soft” means that they are metrics derived from participant responses to questionnaires rather than “hard” metrics that are derived from actual quantifiable inputs. From reading both reports, you can see the impact that February’s stock market sell off had on people’s temperaments. The equity selloff from Asia to Europe to here had respondents doubting current and future financial stability. This doubt also fed through into business decisions as presented by the Markit PMI report. However, it is interesting to note that even in the decline of the Markit PMI, the employment component in the index still picked up, highlighting the strong labor market narrative that has been in place the last few months. So clearly all is not bad. In terms of hard data, we got the January Durable Goods report that showed a very strong 3.9% gain for the month in core goods. This report verifies the nice pick-up we saw in another hard data point we got for January, Industrial Production. In 2015, the trend was hard data coming in on the weak side while soft data was running strong. Perhaps that was a reflection of the relatively stable stock market (ex-Grexit part of summer) we had for 2015 and that manufacturing was indeed struggling. Now, assuming equities stabilize from this point, we could be entering a period where both hard and soft data show strength and that would be quite remarkable.
Now we are heading into my favorite week of the month, which is jobs week. On Wednesday we get the ADP employment report as a warmup to the most important labor indicator we have, the nonfarm payrolls report on Friday morning. Also this week, we have both ISM manufacturing and services reports along with a smattering of other manufacturing and housing related data. I’m expecting the ISM services report to show softness for February given the other “soft” data results we’ve seen so far. That being said, in times of uncertainty, it helps to take a step back and look at what the economy really is. The economy is the people who go to work every day in this country and consume goods and services. As long as employment remains healthy, the rest takes care of itself. Based on the latest JOLT survey which showed job openings being near an all-time high, it certainly seems like the labor market will be healthy for the near future.
So remember, when you go out to dinner, take a road trip, or even buy flowers for that special someone, you are strengthening the economy because you are the economy!