The CLI for the United Kingdom and major emerging economies, in particular China, where the assessment points to above trend growth, are showing stronger positive signals compared to last month's assessment."
- Consumer sentiment reached pre-recession levels according to the University of Michigan. This probably reflected lower gas prices, although initial jobless claims hae also been better.
- Producer price increases were lower than expected -- thanks to energy prices.
- Initial jobless claims continued in the 360K range, suggesting that the April spike was seasonal. We should continue to watch this series.
The Bad
The general economic news was not that bad, but some important specific stories dragged the market lower.
- The earnings beat rate really tanked since the start of the season (via Bespoke). The overall rate declined to 60% -- not terrible, but lower than the average of 62%. Read their entire article to see the post-earnings performance of specific companies.
- JP Morgan announced a surprise trading loss. The stock plunged, but that was only the start of the story. Owners (like me) had to re-consider our positions. Analysts like my colleague Scott Rothbort considered whether this story had broader implications. I especially like this comprehensive analysis from Lisa Pollack at FT Alphaville. After considering the evidence, you might enjoy voting in the poll at Wall Street All-Stars.
- The trade deficit was higher. This seems like bad news, but Steven Hansen explains that it shows higher economic activity. (I'm scoring it as "bad" because that is the market interpretation, but I urge the deeper reading).
- European governments are in flux. Since the elections called into question the various austerity plans, the market reaction was negative. For those of us who see the European situation as an ongoing multi-party process of negotiation and compromise, this seems like business as usual -- not a reason for panic.
The Ugly
The US Constitution. I am tired of listening to those blaming Congress and the politicians. The individual actors are doing what you might expect to gain re-election. Democratic government is supposed to hold them accountable, so what do we expect?
The real problem is our system of government. Winston Churchill famously said that democracy was the worst form of government except for all others. The particular US flavor may have finally lost touch with the times. We have what seem like perpetual elections and gridlock. Our legislative process emphasizes the ability to block any change -- especially when the Senate now requires a super-majority to do anything.
Those blaming specific leaders -- or politicians generally -- have it wrong. Those in the US live in a world where changes is difficult to accomplish.
This might be fine for most social questions, but it is not good for financial markets.
Here is an example of the GOP passing a bill to violate the debt ceiling agreement to accept defense spending and cut food stamps. This is not serious legislation, but a political statement. The Democrats are doing the same thing.
And meanwhile we have a study of a study about studies. I despair at trying to explain how this makes sense.
The Indicator Snapshot
It is important to keep the current news in perspective. My weekly snapshot includes the most important summary indicators:
The SLFSI reports with a one-week lag. This means that the reported values do not include last week's market action. The SLFSI has moved a lot lower, and is now out of the trigger range of my pre-determined risk alarm. This is an excellent tool for managing risk objectively, and it has suggested the need for more caution. Before implementing this indicator our team did extensive research, discovering a "warning range" that deserves respect. We identified a reading of 1.1 or higher as a place to consider reducing positions.
The C-Score is a weekly interpretation of the best recession indicator I found, Bob Dieli's "aggregate spread." I'll explain more about the C-Score soon. Bob also has a group of coincident indicators. Like most of the top recession forecasters, he uses these to confirm the long-term prediction. These indicators are not close to a recession signal.