Lexington, Massachusetts Investment Management
Lexington, Massachusetts Investment Management
V-D
“I have thee not, though I see thee still.” – William Shakespeare, Macbeth
Welcome to this vacation issue of Avalon’s MarketWeek. It’s a pity that traders didn’t take more of a vacation last week, when we speculated that soothing August rhythms should set the tempo. They didn’t.
However, last week’s action was a very typical post-earnings season stumble. Without any scientific study (it’s a vacation issue, after all), we would guess from experience that a market that rises during one of the four peak earnings months (January, April, July, October) usually gives some of it back the following month.
In fact, last week was very reminiscent of late January of this year. A fine December-January rally stumbled on its own length, triggered by headlines about slowing Chinese growth. The funny thing to us was that last week’s Chinese data looked to us like it could have been prepared six months earlier. The government said it wanted to slow things down to avoid inflation and bad lending. A couple of quarters later, it announces that it has succeeded. Standard stuff in China.
But the report came on the heels of a slightly worse than expected jobs report that was greatly overdramatized in the wake of its shortfall. The flood of anxious assessments in the media set us up for taking some money off the table, and apparently the Chinese report was a good enough reason.
After companies reported first quarter earnings, the quick death of the “V”-shaped recovery narrative motivated a big sell-off in an emotional over-reaction to what was never more than a fairy tale. Now we’re going to have to endure a round of ghost stories about the hobgoblins of the “D”-shaped narrative, or Deflation nightmare. From “V” to “D”, we think it will all turn out to have been a lot of fantasy about what might have been. Pass the marshmallows.
The Fed prepared to do more quantitative easing, consumer inflation is a little higher than expected, and retail sales were a bit better too (in dollar terms. When the upward revision to June is factored in, July sales dollars were higher than forecast. The press focused on the misleading one-tenth of a point shortfall in the consensus percentage estimate). All of that looked pretty good to us.
In the coming week we would focus on the New York and Philadelphia business surveys, along with the July Industrial Production report. The housing news will be weak, but housing is weak for the rest of the year and shouldn’t be looked at for trend changes. We think the odds are growing for a sudden drop in weekly unemployment claims.
The euro got crushed earlier in the year, and so European exports went up: Germany had its best quarter of GDP since 1990. The yen had a massive rally, and so Japanese exports were down, along with its GDP. The dollar rallied and our exports went down. This is pretty simple stuff, really. Currency down, exports up. Exports up, GDP up; imports up, GDP down, but not domestic demand.
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