The Relief Rally Cometh

As expected, the thinly traded equity market is experiencing a relief rally of sorts as a large drop in jobless claims last week has spurred buying among the few traders that are in today.  While there are reasons to believe that the data could be somewhat unclean given the noise that often accompanies economic reports during holiday-shortened periods, the fact is that the downward trend in jobless claims is clearly continuing apace and suggesting that firings are slowing across the country.  And though reduced firings do not necessarily translate to increased job creation and economic expansion, the data is consistent with a domestic economic environment that is seeing stabilization and decreased business pessimism take hold.  But as is so often the case, this positive data point was met with equally negative news as well.

Though it appears to of little consequence to the markets today (due in no small part to the light volumes and bias towards a rally after yesterday’s weakness), this morning’s Commerce Department report on durable goods orders during the month of October noted a 3.3% decline versus the market’s expectation of no change.  Some of this decline was offset by an upwardly revised September number that indicated that orders grew 5.0% during the month (from original estimate of 3.5%), but the fact remains that this marked the steepest decline in orders since January 2009.  And as a leading indicator of economic activity, such a dramatic decrease in orders suggests that growth remains elusive as businesses remain hesitant to expand their capital expenditure budgets.  In fairness, this is but one data point in a generally positive durable goods trend, so it would foolhardy to draw too large a conclusion from this report.  However, these numbers do reinforce the notion that the U.S. economy’s growth rate has slowed significantly of late, which leaves the possibility of a double dip recession on the table (though the probability of this occurring is probably less than 50-50 at this point).  And with production capacity rates still sitting at low levels, the incentive for investing in new properties, plants, or equipment is equally miniscule as existing resources can be employed to address any increase in demand.

The final tidbit of economic data today from the Bureau of Economic Analysis noted that personal income levels rose 0.5% during the month of October.  Disposable income also rose during the period by 0.4%.  To be sure, additional income in every consumer’s pocket is a good development for the U.S. economy’s long term health and this report certainly suggests that wage pressures are continuing to abate.  That said, this increase in personal income levels only translates to near-term economic stimulus if individuals are willing to translate this cash influx into additional consumption.  If individuals choose to save their increased income (whether it’s putting it in a savings account or paying down household debts), little immediate benefit will be seen, though the longer term pool of capital available for investment does improve (savings have to increase to provide long-term growth).  Looking at the BEA data, the savings rate ticked up to 5.7% from 5.6% in September.  This suggests, to me, that individuals are continuing the general trend of spending less and saving more.  As a result, the benefit to near-term GDP readings attributable to increased consumer spending will prove to be somewhat muted for the foreseeable future.  And with such a large portion of GDP contingent on spending (about 66%), this sets up for an economy that will see positive, but below-trend growth.  Such a scenario is consistent with many public and private forecasts.

So with the Thanksgiving holiday bearing down on us, I’ll reiterate my skepticism over any price action being a harbinger of things to come over the next month.  I continue to believe that we’re in for a stagnant market for the remainder of the year as investors play tug of war between the negative effects associated with sovereign debt concerns and the bullish seasonal bias that often reins during this time of year.  For my money, the first two weeks of December are likely to prove much more insightful on the market’s future direction as this will constitute the final days of broad participation for the year.  In particular, I want to see if the rally in the U.S. Dollar can continue (it appears to be very early in a larger move higher) and whether or not the recent price action in gold bullion is indicative of a tired or consolidating market.  How these two markets trade will say a lot about the ultimate direction of equity prices and, to a lesser extent, Treasury yields.  Until then, I hope you all have a wonderful Thanksgiving full of family, friends, and too much food.  Also, don’t forget to tune into the Texas A&M vs. t.u. games Thanksgiving night and root for my Aggies.  With what appears to be a turnaround football season at hand, there would be no greater way to cap the season than a win of the Longhorns in Austin.  Gig’em!

Until Monday…..