28 Oct Locking Bias
This is truly an interesting economy we are in. To begin with, we have never seen this type of stock market growth and record setting in a market of stagnant GDP growth. After a semi-stock correction, the stock market is again back above all resistance levels, and back within striking distance of all-time highs. Not only has GDP been sub-3% for years, this is also happening when corporate gross income is far below historic levels to achieve the net income corporations have earned. This means that they achieved the excess profits through cost cutting. History has shown that corporations can only avoid reinvesting a certain level of profits back into employee growth, technology, and needed expenses. Many businesses have been using their cash to buy back their stock, which has further fueled the stock market growth. Eventually, businesses will need to get back a more sustainable long term strategy, which will not be as friendly to their stock prices.
Durable Goods for September were reported at -1.3%. This was well below the +0.9% gain anticipated, and shows that consumers are not buying large ticket items as they recently were. When you exclude transportation, Durable Goods were -0.2%, which was also well below the market’s expected +0.5%.
The Case Shiller Home Price Index for August was reported to be +0.2%. In following the recent downward trend, this was below the +0.4% expected. Year over year, the Home Price Index was up 5.6%. However, the market was anticipating +5.8%, so this missed expectations as well.
In spite of the recent semi stock correction, Consumer Confidence levels were again shockingly high. While the market was expecting a reading of 86.8, the actual report was 94.5. It seems that not even a drop in the stock market is able to shake off the confidence of a consumer…. This was a seven year high, and a welcomed sign for incumbent politicians as we move into election week.
With the stock market again boasting higher, there is a significant headwind in the bond market today. Therefore, we are going to have a locking bias, as we see little opportunity for bonds to gain in the light of a strong stock market. If the stock market gets pushed back below support, this would be a good sign for the bond market. With both the stock and bond markets facing critical levels, there is a lot at stake today. A break higher in stocks will be very negative for the bond market. We will have to watch and see how things play out.