Is the U.S. Growing or Slowing

It’s really easy, with the ever-expanding universe of information sources, to miss the forest for the trees.

It's easy to feel like you need to make a change in your portfolio every time you hear market pundits talk about each data point as if it’s the most critical data point in the history of earth.

The problem with that strategy is that you would change your portfolio 9 times a day.  Oh, and every data point issued by the government is not, in fact, the most critical data point in the history of earth.

Last week is proof.

The S&P 500 declined 0.27% last week, essentially unchanged on a week-over-week basis.  If you hadn’t watched the market action you would have assumed (incorrectly) that it was a pretty ho-hum week in the markets.

However, what that cumulative return for the week doesn’t tell you is that the S&P had its worst day in 4 months on Monday, which was followed by the best 2 consecutive days in 3 months on Tuesday and Wednesday.

The return for last week also doesn’t tell you that the worst day in 4 months occurred on volume that was approximately 50% above average (high conviction) and that the best 2 consecutive days in 3 months occurred on below average volume (less conviction).

All of this activity was driven by a mixed bag of data reports out of the US that had investors flip flopping as to the tapering impact of each report.

It would be extremely easy among all of the blog posts, Tweets and CNBC talking heads to forget the core purpose for the equity markets, to discount future growth expectations.

It’s all about growth baby, the rest is just small talk.  Short-term price movements are based on crowd psychology and technical factors.  But the farther out from today you go, the more markets move towards their underlying fundamentals.  For equity markets, this means they move towards the expected growth of the underlying economy they represent.  Period.

 

Growing or Slowing?

So is the US growing or slowing?  Let’s look at what the data is indicating first and then we’ll look at what type of US growth different segments of the capital markets are telling us to expect.

Last week’s data reports showed that US growth isn’t accelerating sequentially but it's also not materially deteriorating.

The week started with the December retail sales number that showed sales slowing slightly from November.  However, despite the slowest retail sales number since September, December was the 9th consecutive month of consumer spending growth.  And if you exclude automobiles, gasoline and building materials, retail sales had a very healthy gain during December.

That said, year-over-year spending remains at the low end of the growth trend we have seen since The Crisis.  For perspective, post-crisis retail sales peaked at 8% mid-2011 and has been downtrending ever since.  December’s year-over-year growth registered at 4.1%.

A couple of the other key reports last week were weekly unemployment claims and industrial production.  Unemployment claims were unchanged week-over-week but showed a respectable 7% decline year over year. 

And while industrial production declined month-over-month from November, the year-over-year growth rate was the highest since mid-2012.

So, while investors' conclusions and markets jumped all over the place last week, I didn’t see a lot in the data to get worked up about.  My takeaway from last week is that all signs point to the Fed continuing to exit from QE. 

This conclusion was backed up during the week by a number of Fed officials. It should be pointed out that not all of these officials who commented last week are voting members.

 

Check The Trifecta

As always, data is only useful when it's put in the context of the broader markets.  Now that we're two and a half weeks into 2014, what are markets’ expectations for US growth?

The strongest periods of economic growth for the US have always been accompanied by the trifecta of strong equity markets, a strong US Dollar and rising/elevated interest rates.

So far this year that trifecta is mixed: S&P 500 (SPY) -0.15%, US Dollar (UUP) +1.02% and interest rates have declined 6.6%.

It's not surprising to see the SPY start the year off sluggishly after a huge 29% return in 2013 and a monster 176% return since the March 2009 lows.

The dollar’s strength is a welcome change after finishing last year declining in 11 out of the final 16 weeks, losing a total of 6.5% since peaking in early July 2013.

I’m also not surprised at the weakness in interest rates so far this year. 

As I pointed out in the December 12 report, each of the last two times that the Fed has ended a QE program, rates have spiked initially and then declined over the intermediate term. That's exactly what we saw once tapering was announced in mid December. 

Interest rates on 10-year Treasuries tried unsuccessfully a couple of times to breakout above the 3% threshold.  The last attempt was on January 9 and since then, rates have fallen 6%.  There's likely more downside in rates until they find a floor around the 2.45% area.

 

Under The Hood In US Markets

Drilling down a bit more, parts of the US capital markets, investors have started the year by positioning themselves for slower growth.

My “slow US growth” market index, which consists of utilities, REITs, gold and Treasuries, is up 2.51% year-to date.  This compares very favorably to my “high US growth” market index, consisting of technology, financials, basic materials and US small caps, which is up 0.42%.

It’s too early to tell if these markets are pricing in slower growth or if the markets are attempting to decipher the Fed’s next move and are preemptively shifting allocations.  Based on the less than spectacular economic data and what various markets are indicating, the US is in store for slower growth in 2014.

Frankly, it's a moot point. It doesn’t matter if the US enjoys high growth or begins to slow from last year because we focus on the critical economic and market indicators so that we can position ourselves to take advantage of the opportunities that present themselves, regardless of what's happening