Comstock Partners, Inc.April 18, 2013
Substantial Evidence Of An Economic Slowdown
To gauge the current state of the stock market, look no further than the economy. As far as the market is concerned, everything else is random noise. Recent data releases make it quite clear that the economy lost momentum in March and is continuing into April as the overwhelming majority of reports come in below expectations. We cite the following evidence:
1) March payroll employment dropped to a disappointing 88,000.
2) The ISM manufacturing index dropped to its lowest level since December.
3) The ISM non-manufacturing index declined to its lowest level since September.
4) Retail sales fell in March and the prior two months were revised down. The weakness was widespread through various categories.
5) The University of Michigan consumer confidence index declined to its lowest point since July.
6) The NAHB housing market index dropped for the third consecutive month to its lowest level since October.
7) While housing starts were up 7%, more than the entire gain was accounted for by multi-family units as single family starts were down for the second time in the last three months. New building permits were similarly down the second time in three months.
8) The NFIB small business index declined in March and is only two points above the lowest level of the past year and three points lower than a year earlier. Moreover, the majority reported weaker sales over the last three months and expect a drop in sales over the next six months. This does not bode well for new hiring or capital expenditures from an important sector of the economy that is often not well represented in other key indicators of the economy.
9) The Empire State Index fell to 3.1 from 9.2 and 10.3 in the prior two months.
10) Although March industrial production increased 0.4%, it was almost all accounted for by a 5.3% rise in utility production while the manufacturing sector fell 0.1%.
11) The IMF cut its 2013 forecast for global growth to 3.3% from 3.5% and the Eurozone to -0.3% from +0.1%. Eurozone GDP has declined for five consecutive quarters and the first quarter will probably be the sixth. The Eurozone periphery nations are already in recession and getting worse, and now France and Germany are slowing down as well. This will be felt in the U.S. as well since American exports to the EU fell to a two-year low in February
12) China recently reported disappointing results for first quarter GDP at a time when their real estate sector is in the midst of an inflationary bubble.
All of the above indicates that the economy is once again entering a soft spot as it did in the prior three years. The big difference is that in 2010, 2011 and 2012 the soft spot more or less coincided with the end of QEs 1, 2 and 3. In each instance QE was re-instated and the economy bounced back to its previously mediocre growth rate. In the current instance, however, growth is slowing down even while QE is in full force. In addition, unlike the prior slowdowns, the economy is facing the additional headwinds of the January tax increases and the sequester, which have not yet been felt in a major way. In our view it would be extremely difficult for the Fed to provide any more support to the economy than it already has.
Already, the economic slowdown is being reflected in the price of gold, which has virtually collapsed and in long-term government bond yields that have dropped sharply in recent weeks. In fact, the prospect of deflation that we have constantly discussed in our comments is suddenly being widely discussed in the media.
Most observers are taking the recent market weakness in stride as they say a correction was overdue anyway, and that they are actually looking forward to buying the dips. We take the contrary view that the market is in the midst of making a major top as a result of an economy that will surprise on the downside, taking current optimistic earnings forecasts down with it.