They Earned It

They earned it.  Earnings helped buoy stocks in a low volume session that ended in a mixed close for equity indices in yesterday’s session.  A slew of positive earnings releases before the bell prevented stocks from slipping further on the heels of a tough session on Monday.  More hope was in the air as investors began to speculate that the Fed announcement, expected this afternoon, will feature some more accommodative talk.

Market drivers from yesterday included: 1) Chinese telecom equipment maker Huawei will be facing criminal charges which could complicate the US – Chinese trade talks that begin today. 2) California Utility PG&E officially filed for bankruptcy resulting from liabilities associated with the California wildfires in 2018.  The move was largely expected prompting shares to trade up by +16.49%. 3) The administration announced the imposition of trade sanctions on Venezuelan crude imports amongst other steps aimed at ousting President Nicolas Maduro.  Crude oil (WTI) traded up by +2.54% to 53.31 per barrel. 4) Harley-Davidson missed earnings by -41% as they continue to feel the real affects of the trade war with China.  The stock traded off by -5.05% in yesterday’s session.  5) The Fed began its two day FOMC policy meeting yesterday and the highly anticipated policy statement will come out this afternoon.  Many are hoping for some more doveish talk including the possibility of suspending asset sales. 6) The Conference Board released its Consumer Confidence Index yesterday which came in at a lower-than-expected 120.2 versus last month’s 128.1.  The real news in the number was less about the slipping headline number and more about the spread between the Present Situation and Expectations, two other components from the release.  Many analysts are pointing to the fact that the spread has hit highs that are rarely seen.  The spread reflects the difference between the current situation and what consumers are expecting in the future, so a wide spread would mean low confidence for the future.  The spread typically spikes prior to recessions, which is why it is getting so much airtime.  As I briefly mentioned yesterday, consumer confidence is a critical indicator because it reflects the behavior of consumers, which are the biggest driver of GDP (to learn more about GDP and recession, read my note on the subject here: https://www.siebertnet.com/blog/index.php/2018/12/19/crude-behavior/ ).  Because it is geek-out Wednesday, I thought I might delve a bit more into this often-overlooked number.

The Consumer Confidence Index, or CCI, is distributed by the Conference Board which is a non-profit economic think tank founded in 1916 with a mission to provide critical intelligence for industry.  The CCI, which is currently released on the last Tuesday of each month, reflects the level of consumer optimism or pessimism about economic conditions in the near term.  Consumer sentiment is not only a critical factor in business planning but also in assessing the health of the domestic economy.  I have said it before and I will say it again (because I think it is important): consumer expenditures represent some 68% of GDP making individual consumers the largest contributor to the economy.  If consumers stop spending, it directly affects GDP.  Indirectly, if consumers stop spending, corporations make less revenue and in turn cut back on their expenditures, which represent about another 18% of GDP.  Directly and indirectly consumers represent around 85% of the domestic economy, which is why a gauging of consumer sentiment is critical. The Conference Board constructs the CCI by surveying 5,000 households across all 9 census regions.  The surveying began in 1967 on a bi-monthly basis and was switched over to monthly in 1977.  Respondents are asked 5 questions related to: 1) Current economic conditions, 2) economic conditions over the next 6 months, 3) current employment conditions, 4) employment conditions over the next 6 months, and finally 5) total family income over the next 6 months.  Surveyed households are allowed 3 choices for each condition a) positive, b) negative, or c) neutral.  Once the values are collected an index is created for each question as follows:

CCI x  = ( Rp / ( Rp + Rn) ) * CCI x p

Where:

CCI x = current month index for question x

Rp = positive responses

Rn = negative responses

CCI x p = last month’s index for question x

Base year is 1985 with a value of 100

Once all of the question indexes are created they are averaged together to form the Consumer Confidence Index. Notice that 3 of the 5 questions (60%) are focused on future expectations, while the other 2 represent current conditions making the CCI a leading economic indicator.  Separate indicators are created using the two current conditions questions and the three expectations questions.  The results are the Present Situation Index and the Expectations Index.   It is the spread between those two indices that many analysts look at as a potential predictor of a recession.  That spread was 82.3 in yesterday’s release versus 50.1 in December of 2016 in the month after President Trump was elected.  Analysts also use the Present Situation index itself as a warning sign of recession.  The current Present Situation Index is compared to the reading a year ago, and decreases are considered red flags.  The good news is that Present Situation Index is higher than a year ago, most likely a result of the strong employment situation.  Yesterday’s CCI is still considered high, but it has been retreating since October of last year and remains just slightly above its level of January 2017, the month President Trump was inaugurated.

Today, we will get ADP Employment Change which is expected to reflect 181k new jobs versus last month’s 271k.  We will also get Pending Home Sales which is expected to show a year over year decrease of -7.0% versus last month’s -7.7%.  The real market mover will come this afternoon as the FOMC will first release its policy statement at 2:00 PM Eastern.  The Fed is expected to leave rates unchanged but many expect them to remove the language about further gradual hikes, which would be doveish.  Investors will also watch Chairman Powell very carefully in his press conference during which he will most likely continue to reiterate his prior comments: patience and data dependence.  Many will also be searching for some signs that the Fed will curb asset sales, which the market has most likely already factored in.  Apple posted a positive surprise after the bell yesterday, which will set a positive tone for the FAANGS leading into today’s session.  Facebook will report along with Microsoft and Tesla after the close, amongst others.  Before the bell we will get a number of releases including AT&T, Boeing, Anthem Healthcare, ADP, and McDonalds.  All of this should make for an interesting, if not bumpy, session.

daily chartbook 2019-01-30