February 20, 2020

Irrational Apathy

One need only follow the news media these days to find something to be upset about. Nothing new, that’s always been the case, fear and anger are the gateways to the public’s attention. It worked in the days of Benjamin Franklin and it works in the information age as never before. The problem that often arises is the absence of good news, or worse the transference of bad news into good news. But the intent is to get a click, and that’s all that really matters, right?

After last weeks favorable earnings outcomes for Nvidia (NVDA) the strong finish into the weekend was met with two options of concern. The first was technical as the various momentum indicators that track the broad indexes began to rise into overbought territory again. The second was the continuing narrative on the coronavirus from how hiding the facts is the norm, to the possibility of a governmental lab as the responsible source. Then, Apple (APPL) pre announced the next quarter to alert that “demand for our products in China has been affected”. Needless to say, coming into this week the stock was down around 2% which seemed a somewhat tepid response. Not surprising that the market seemed to appreciate the heads up since the next day the stock traded up helping the S&P500 reach a new historic high. In a technically overbought environment volatility like this is typical as further implied by many of the biggest moves in the stock market coming from very speculative stocks, usually a sign that investors are running out of ways to take risk, and a good time for the market to pause.

At the same time news started to emerge that the spread of the virus appeared to be slowing down, some modestly promising economic data was coming out of Europe and US economic data continued to show steady growth. Today the Leading Economic Indicator Index (LEI) came in at a strong .8% and alleviating the potential of a recession that was still implied by the previous three months.  Beginning last week Retail Sales increased to a 4.4% year over year growth rate, and yesterday although Housing Starts was down -3.8%, it was much less than the expected -11.7% and continues to remain steady. Permits for new homes were up 9.2%, the most in a month since 2017 and the strongest in around ten years. An interesting note permit applications are another sign that manufacturing may continue its growth as indicated by last month’s ISM data. This week the Producer Price Indicator (Inflation) was up .5% taking the year over year inflation rate to 2.1%. Also, this week the Philly Fed Index, a survey of manufacturing in the Philadelphia federal reserve bank district grew, including New Orders, to its highest level in three years.
   In my opinion some of this activity is due to tremendous stagnation of the manufacturing sector of the economy over the past decade, due in part to correlating stagnation in European economic growth, but also pauses in activity due to trade issues and the reallocation of resources coming from the current administration. Going forward, while it is increasing consumer demand that is driving nearly all western economies, the improvement in the manufacturing is another positive for global growth. With the possible exception of the emerging markets impacted by the coronavirus.

External Events
In the past week, led by the current administration and intervened by the past administration the battle raged for who is responsible for the current state of economic growth. The election scenario continues to intrigue as it became clear recently that a new entrant into the presidential race is appearing to literally buy into the lead. On top all that the Oscars continued their trend of social bravado, coronavirus news continues to confuse more than inform and yesterday’s debates underscored the challenge that politicians are facing in trying to convince the public that they should be angry when by most measures, they already are. The point is these situations can be used as measures of economic health as much as any government collected data. And given that mannerisms that include arrogance and narcissism are a frequent outgrowth of wealth and celebrity, today may seem more widely practiced than usual. In my opinion, this the opposite of “irrational exuberance” and can be interpreted as an indication of excess free time, excess discretional spending, excess return on risk, and excess regret. Sound indicators that the steady current economy is as the government departmental data suggests. And as the Consumer expectations rise with declining unemployment trends, the external events have a softer impact on Consumer comfort. This is why volatility is up, overbought markets are better not ignored and as the domestic and global “socioeconomic” picture becomes clearer, so to will the reason for the capital markets to respond favorably.