This article first appeared at The McAlvany Intelligence Advisor on Friday, December 26, 2014:
Observers of new highs being put in by stocks at the Wall Street Journal could hardly restrain themselves. Eric Morath and Ben Leubsdorf, writing in the Journal on Tuesday, noted that the economy is now enjoying “a sweet spot of robust growth, sustained hiring, and falling unemployment [which is] stirring optimism that a post-recession breakout has arrived.”
Translation: Good times are here again, and likely to continue. Break out the Brie and Chablis.
Looking past the celebrations and the prognostications seemed, at first view, to confirm the market’s outlook: jobless claims came in below expectations, Bob Pisani at CNBC noted that warnings of lower earnings are at the lowest level he’s seen in years, incomes are rising faster than inflation, gas prices are close to record (inflation-adjusted) lows, retail sales are exceeding already optimistic expectations, and so the chorus is celebrating the gift.
One of the reasons for the Santa Claus Rally phenomenon, according to Investopedia, is that the pessimists have left town:
There are numerous explanations for the Santa Claus Rally phenomenon, including tax considerations, happiness around Wall Street, people investing their Christmas bonuses, and the fact that the pessimists are usually on vacation this week.
They do appear to be away, for the moment. On Tuesday, the Commerce Department said that the US economy expanded in the third quarter at a 5% annual rate, the strongest in 11 years. It also reported that consumers are spending their gas savings at the mall and at restaurants, while businesses are opening their wallets as well, investing in upgraded equipment and software. In addition, exports have remained strong even in the face of a stronger dollar.
Others in the chorus singing Hallelujah include the American Staffing Association, which just announced that its index of hiring is now the highest it’s seen since June, 2006. The Association of American Railroads, bringing in the bass section, reported that, for the week ending December 13, total carload traffic is up more than 12 percent over the same week a year ago.
The tenor section over at the Conference Board sang that its Leading Economic Index (its summary of forward-looking economic indicators) increased by 0.6 percent in November, which followed gains of 0.6 percent in October and 0.8 percent in September. That puts their index at 105.5 percent of where the economy was back in 2004, during the run-up to the popping of the real estate bubble in 2007. For an economist, the group’s spokesman, Ataman Ozylidirim, was positively delirious:
Widespread and persistent gains in the LEI point to strong underlying conditions in the U.S. economic expansion. The current situation, measured by the coincident economic index, has [also] been expanding steadily, with employment and industrial production making the largest contributions in November.
This is how an economist sings solo.
Bringing up the percussion section was the American Trucking Association, which just announced that the tonnage of goods shipped by rail increased by 3.5 percent in November, putting its overall index at 36 percent ahead of where it was in 2000. This is the highest level the ATA has ever recorded.
The sopranos over at the Chicago Fed were positively brilliant, noting that its National Activity Index, a survey of 85 separate economic indicators, was up nicely as well, “suggesting that growth in national economic activity was above its historical trend.”
Gains in paychecks came in 4 percent ahead of a year ago, and much if not most of that, along with savings at the gas pump, accounts for the jump in consumer sentiment registered by the trumpets over at the University of Michigan, from 88.8 in October to 93.6 in November.
And then there’s the Ride to Grandma’s House on Christmas Day index put together by funky economist Mark Perry: How long does a fellow have to work to pay for the gas to get to her house, assuming she lives 100 miles away? In 1975, he would have had to work almost an hour to generate enough to pay for the trip. Today: just 27 minutes. And, wrote Perry, “if gas prices fall another 26 cents per gallon … gas prices … [inflation adjusted] would be the cheapest in US history.”
Not everyone in the chorus is following the music, however. Curtis Dubay, writing over at the Heritage Foundation’s Daily Signal, reminded his audience that, as strong as the current economic recovery seems to be, it is vastly underperforming the recovery as recently as that following the recession of 1981-82:
A year after the similarly deep 1981 to 1982 recession, the economy had three successive quarters where growth exceeded 8 percent. In the second quarter of 1983, the economy grew an astounding 9.4 percent.
Nitpickers in the chorus, looking more closely at the score, noted that a lot of the third quarter’s apparently robust numbers came from an unusual increase in military spending, an event most say isn’t likely to happen again any time soon. They also noted that export growth is at risk as the dollar – the cleanest dirty shirt on the line – continues to make American-made goods less and less attractive to foreign customers.
Still others noted that, for the year overall, growth in the US economy will clock gains of just 2.5 percent, rather disappointing given that this is the fifth year of the so-called recovery from the Great Recession. Finally, those disagreeable baritones sang out that trouble in the oil patch is likely to be felt as companies who have been surviving on major financing and promises of hefty profits in the future discover that new financing is no longer available and that some investors – shame on them – want their money back.
The alto section has some naysayers as well, nothing that the housing industry is still flat, with the sales of both new and existing homes falling in November despite low interest rates and stronger paychecks. The fact that durable goods fell 0.7% in November enhanced the discord.
Right around the corner is the January Effect – another anomaly that could give the Hallelujah Chorus another burst of enthusiasm – which usually means that the rally will continue. But the best indicator, how stocks perform in the first five business days of the New Year, might just turn out to end the concert on a sour note.
For the time being, investors are enjoying the ride and singing its praises along the way.
The Daily Signal: The Economy Just Had the Strongest Growth in a Quarter Since 2009
The Wall Street Journal: U.S. Economy Posts Strongest Growth in More Than a Decade