The FOMC gave the market pretty much what it expected,
and, in view of the run-up in stocks prior to the meeting, equities proceeded
to fall on the news. The lack of any
further dovish statements by the Fed was probably an additional excuse for the
decline. While some pundits thought that
this increased the possibility of tapering at the December or January meetings,
we think that the Fed will, as usual, follow the data, which we believe will continue
to be soft in the period ahead, thereby delaying any tapering until March at
the earliest.
While the consensus thinks that any delay in tapering is
inherently bullish, in our view below trend economic growth combined with
overly optimistic earnings estimates, significant market overvaluation and
extremely high investor sentiment is a recipe for an important market decline
rather than a reason to drive an aging cyclical bull market much higher.
The Fed statement indicates that they believe labor
market conditions have shown some improvement and that household and capital
expenditures have advanced, although they now admit to the slowing in the
housing sector that we have been mentioning in recent comments. We don’t know where they get the idea that
the labor market is improving, and we doubt that they are privy to some secret
data that is not available to us. The last
monthly jobs number available showed an increase of only 148,000, compared to
an average of 163,000 in the prior three months and 188,000 for the year ending
June 30th. A more up-to-date
figure from ADP indicated a gain of 130,000 private jobs, a decline from the average
of 142,000 in the prior three months and 164,000 in the three months before
that.
The “advance” in household and capital expenditures
mentioned by the Fed is true as far as it goes, but the growth is weak, to say
the least. Consumer spending increased
at an annualized average of 1.9% in the 1st quarter, 1.8% in the 2nd,
and 1.4% in the first two months of the 3rd. The tepid rise in spending is consistent with
a similarly weak increase in income.
That is a pace we usually see in recessions. Core capital goods orders were down 1.1% in September
and an annualized 15.4% over the last three months, hardly the sign of an economy
that is ready to stand on its own. In
addition, let’s not forget that GDP grew by only 1.8% in the 1st
half, and, according to Moody's Analytics, is on track for 1.9% in the 3rd
quarter, based on available data.
It is notable that
almost all of the economic data that we have reflects the economy prior to the
government shutdown, which will impact the coming economic data releases. After
that we will be facing the probable lack of a budget resolution and another
debt ceiling fight early in 2014, hardly a reason for increased consumer or
business confidence. The weak economy,
high market valuations and overly optimistic sentiment in an aging bull market
is much more indicative of an impending market top than a continuation of the
increasingly irrational speculation fueled by yet more quantitative easing