US stocks gain, economic data falls.
Over the past four days, US stocks gained the most (percentage wise) since 1933. On the surface this is significant, because 1933 marked a significant turning point for stocks even though the economic crisis had a ways to go yet.
But is that a valid linkage to make?
Now, the stock market is sometimes called “the great discounting machine” for its supposed ability to sniff out great changes in trend well before those changes are obvious elsewhere. In times past, stocks have made a habit of rising months in advance of job gains, economic activity, profit gains, and other such economic data.
However, I will note that the stock market has gotten a bit off the rails lately and it completely missed the warning signs of an impending credit crunch that were given off more than a year ago. The stock market carried on and made new highs even as the financial underpinnings of our entire system were collapsing into the bay. So in some circles (mine included), “the great discounting machine” has lost some of its utility and impartiality along the way.
Today the economic news was horrible.
WASHINGTON (MarketWatch) — The faltering economy was reflected in government data Wednesday that showed dwindling demand for U.S.-made durable goods in October, along with weaker capital spending by nervous companies.
Orders for U.S.-made durable goods fell 6.2% in October, the largest decline in two years, the Commerce Department estimated, as orders for transportation goods fell 11.1%. Economists surveyed by MarketWatch had expected an overall decline of 2.5%. Excluding transportation, orders fell 4.4%.
Ouch. That’s really bad. Fortunately, I guess, the US does not manufacture a lot of stuff anymore, so the -6.2% drop does not have as large an impact on the overall economy as it would have in times past. Still, it is a very, very weak report. Normally, this should have resulted in a pretty good stock market and dollar decline. But this news was completely shrugged off, as was this next report.
Nov. 26 (Bloomberg) — Americans cut spending by 1 percent in October, the biggest drop since the last recession in 2001…A U.S. Commerce Department report showed orders for durable goods slumped twice as much as forecast as domestic and foreign demand dried up.
“It’s about as bad as the 1970s and 1980s,” said David Hensley, director of global economic coordination for JPMorgan Chase & Co. in New York. “We’re looking at back-to-back very deep” slump in the global economy this quarter and next.
The number of Americans filing first-time claims for unemployment benefits fell to 529,000 last week, while remaining close to the highest level since 1992, Labor Department figures showed. The four-week moving average for claims reached a 26-year high.
Purchases of new houses dropped 5.3 percent to an annual pace of 433,000, lower than forecast and the fewest since January 1991, the Commerce Department said today in Washington. The median sales price decreased to a four-year low.
"We’re going from bad to worse,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York, who accurately forecast the drop in consumer spending in today’s report. "The recession is deepening.”
Normally with news that bad, you’d expect a rout of both the stock market and the dollar, but the opposite happened in each case.
There are two possibilities. The first is that stocks and the dollar are signaling that US recovery is right around the corner and that the US will lead the world.
The second is that both markets are no longer sending useful price signals to investors.
These are wildly divergent positions and I’ll be exploring both for subscribers in an upcoming report.
I will leave you with this. After the initial stock market rout of 1929, which saw the market drop 48%, stocks rallied back 47% from there over the next six months before beginning the long slide to the bottom in 1932.
Sometimes stocks know what they are doing, and sometimes they don’t.
So I guess the great discounting machine has been broken before. In that sense, we might decide to put more weight on other economic data than stock market performance, and that’s why I keep linking in the basic data.
But make no mistake, sooner or later the trillions of dollars of new liquidity will "hit the streets," and we’ll see a return of consistent stock price increases. Whether those will outpace the attendant inflation remains to be seen.