The last week-to-ten days witnessed a host of US macro-economic data releases, plus dramatic events in Europe and a mind-boggling loss at the largest US bank. Is there a wonder the markets were so volatile?!
Economic Data
The producer price index for April fell 0.2%. This measures a basket of prices at the wholesale level, and typically leads those at retail. But not always. Why? Because it doesn’t include services. Indeed, the consumer price index was unchanged. Taken together, this kind of price behavior is quite unusual for an economy in recovery mode (at least officially). But it’s good news, on balance. It means inflation is not a concern, yet, and the Federal Reserve has room to loosen once more, should it feel the need to do so. Once energy and food are subtracted – the “core” measure of prices – both indices actually increased 0.2%, still okay.
Retail sales expanded a measly 0.1% last month. A disappointing number, especially compared to the prior month’s 0.7%. The data doesn’t cover all consumer spending, only items purchased at stores, gas stations and the like (e.g., doctors visits are excluded). But it gets at the trend and, as such, the news is not great. However, it’s only one month, and this particular statistic is notorious for being revised.
Housing starts were up nicely in April, 40,000 units higher than in March. But, at 719,000 (annualized), that’s still extraordinary weak relative to recent history. On the bright side, industrial production (which covers manufacturing, utilities and mining) expanded smartly – 1.1% over March, double what the consensus had expected.
So, What do We Make of all This?
The economy is definitely moving in the right direction. But the degree of growth is not what it should be at this stage of the business cycle. What’s the problem? Listen, I don’t know for sure, but my feeling is that the economy has the capacity to expand, but is being held back by a number of forces:
1. Households, businesses and even the public sector are still suffering from the sharp recession which, although technically over, has made everyone more tentative and cautious.
2. The craziness in Europe – Greece is effectively holding the Continent hostage, even mighty Germany! – is weighing on people’s decisions to purchase goods and services, as well as financial assets.
3. JPMorgan’s debacle has deepened not so much people’s distrust of the financial giants (it was deep enough) but their worry that the financial sector can longer be a partner in US economic growth.
Your Portfolios
At Steven I Dym & Co., we’re long-run investors. We try to see through the day-to-day drama in order to concentrate on fundamentals and find value. Our on-going belief is that fundamentals will ultimately become evident, but waiting for them to play out is often painful. We have certainly suffered, particularly as the past month or so has debillated the financial sector. To be sure, we have reduced exposure in our portfolios, as prudence would dictate. Still, the fundamentals in the US (balance sheets, p-e ratios, business cycle dynamics) point positively, and we are so positioned.
