The cliche is that the market climbs a wall of worries, but the specter of the Dow breaking 13,000 was accompanied by a chorus of arguments from informed observers that the enthusiasm was overdone.
Roughly six weeks ago, in “How long will the markets be able to defy gravity?,” the Financial Times’ Martin Wolf looked at equity valuations over a long period and concluded that despite the February 27 dip, equities were still considerably overpriced. The conventional response to that is that US equities are cheap if you compare earnings yields to corporate bond yields (and the retort it is that that either implies that equities are cheap or bonds are overpriced, and there is strong evidence that risk premia are too low, hence bond prices too high).
One of the reasons for optimism Tuesday was the durable goods report. But William Trent at Seeking Alpha tells us that it isn’t what it’s cracked up to be. While the month-to-month increase may have appeared to be good, longer-term comparisons showed otherwise:
If you believe the headlines, March durables orders were surprisingly strong:
New orders for costly and long-lasting U.S.-made manufactured goods climbed by a surprisingly strong 3.4 percent….The pickup in March durable goods orders followed a revised 2.4 percent February gain and handily surpassed Wall Street economists’ expectations for a 2.5 percent increase….
Of course, we don’t automatically believe the headlines. For one thing, the change in durable goods statistics can be volatile from month to month. For another, the headline numbers reflect seasonal adjustments that may result in errors when the economy is at turning points. As is our practice, we looked at the durable goods report comparing non-seasonally adjusted numbers and focused on the year/year change. The difference between what we saw and the headlines was surprising, to say the least.
Similarly, the Fed’s monthly Beige Book report wasn’t particularly cheerful. From MarketWatch:
There were few signs of a pickup in the U.S. economy in the early days of the second quarter, the Federal Reserve reported Wednesday in its Beige Book.
Most of the 12 Federal Reserve district banks “noted only modest or moderate expansions in economic activity,” the Beige Book said. Economists have enough information about the first three months of the year to know that it was pretty much of a bust.
Growth was described as nothing special, but not worse than that.
Economists surveyed by MarketWatch expected first-quarter growth to rise at a slim 1.8% annual rate, the lowest since Hurricane Katrina.
Another Seeking Alpha post, this one by Andrew Horowitz, highlights the well known but not often mentioned fact that the Fed is in a bind. If it increases rates, it will further damage the housing market but help support the dollar, and if it cuts rates to stimulate the economy, it will tank the dollar. This dilemma has become more acute as the dollar has fallen during a period when the Fed has taken no action on rates.
And all of these are before we get to the usual prime suspect in a bearish scenario, the housing slowdown. Barry Ritholtz at the Big Picture gives us a his list of sectors affected by the slump (the post has commentary and links for each one) and Nouriel Roubini has asked readers to add to it:
Thoroughbred horse auctions
Outdoor Power Equipment and the small-engine manufacturers
State property and sales tax receipts