Dan Greenhaus is the Chief Economic Strategist at Miller Tabak + Co. where he covers global economies, markets and portfolio theory. He has contributed several chapters to Investing From the Top Down: A Macro Approach to Capital Markets (by Anthony Crescenzi).
This is his most recent commentary:
It is well known at this point that September is the worst month of the year since 1950 for equities. How bad? The S&P 500 is down 0.5% more than the only other down month, the Dow is down 0.9% more than its next closest down month and the Nasdaq is down 0.6% more than the next worst month. There is clearly something to the seasonal weakness (the S&P has been positive in just 43% of Septembers since 1950) and with a 50% rally in the books for equities, September is clearly worrying some.
Compounding this nervousness is the technical level of the S&P which, as we type this morning, stands below the famed 1015 level which represents the 38.2% retracement of the bear market. While a violation below this level does not, by itself, mean anything in terms of moving lower, it is a level traders are eyeing and if we move convincingly through it, we may see further selling.
Related to the weakness here at home (Europe is down as well), bond are bid with the 10 year now down below 3.40%. The strength of the bond market has come along with strength in the equity market, an interesting turn of events given the stories being told by each. On the one hand, you have equities that, by some accounts, are pricing in growth of 4%-5% next year. On the other, the bond market continues to grind higher showing no concern for the “V” shaped recovery many are calling for. As we progress through the year, its very clear that both these markets cannot be correct.
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All around the world
China’s manufacturing activity continued to expand in August. The NBS PMI rose to a 16 month high reading of 54 as virtually every component pushed higher save for new export orders which were unchanged. New orders was up, output was up and imports was up. The private sector PMI, now called the HSBC PMI, also rose to a 16 month high thanks to a huge pick up in new orders.
In the case of both PMIs, it is clear that domestic demand continues to be the primary driver of growth as export orders, while higher, are not pushing upwards to the same degree. At the same time, there was a gain in the NBS input price index to the highest level since July 2008 while employment components gained as well. This will probably stoke inflation fears as the year progresses however Chinese officials are mindful of the effects of their top down policies and more than likely, will be taking steps over the second half of the year to address the concerns. Tightening does not appear to be on the horizon (until the middle of next year perhaps), however a moderation in new loan issuance (which generally occurs in the second half of the year should help.
Turning to the Eurozone for a moment, the unemployment rate ticked higher, as expected, to 9.5% from 9.4% in the prior month as the unemployment level rose by 167K. While German’s unemployment situation held steady, increases in Spanish (18.5%) and French (9.8%) unemployment pushed up the region’s rate.
In any event, it is clear that unemployment levels are worsening in both Europe and the U.S. however the pace of worsening is easing. This is to be expected towards the end of a recession as our attention should not be on further gains in the rate but rather where the increases will cease. Here in the U.S., the unemployment rate will probably continue moving higher stopping around 10.2% or so but unemployment in the Eurozone is expected to go much higher, perhaps bumping up against 11%.
Over in Germany, retail sales rose 0.7% as expected however sales are still down 1% on a year-over-year basis. Underscoring the weakness seen in the past year, this is only the third positive reading for sales in the last ten months. Today’s data follows the recent release that showed further gains in consumer confidence in Germany as well as new data that showed unemployment in the country held steady at 8.3%.
It is certainly encouraging to see the turnaround in retail sales figures however the reality is that Germany is heavily reliant on exports (40% of GDP or so) and any turnaround in regional indicators are going to be dependant on a turnaround in external demand.
The well known turn around in the manufacturing sector will get further corroboration today when the ISM index is released at 10. The index is expected to at least touch the 50 level for the first time since January 2008. The gain in the country wide index would reflect improvement in regional indicators and would confirm the sector’s recovery. There are two things worth noting though:
First, as important as the headline figure is, we must keep an eye on both employment and inventories as both are crucial to the turnaround story. As well, there was a big jump in prices paid in July. Further gains would be problematic for those looking for a low inflation environment in the second half of the year.
Secondly, and perhaps most importantly, in the previous recession, the ISM first broke above 50 in February 2002 and stayed above that level until October. We must be very careful to remind ourselves from time to time that improvement in the economy is not always related to improvement in the equity market. While the ISM was above 50, the S&P 500 declined by nearly 30%.
Pending home sales, construction spending and vehicle sales are all also out today.