Comstock Partners, Inc.October 31, 2013
Current Conditions Are A Recipe For An Important Market Top
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