Weighing The Week Ahead: Will Policy Uncertainty Increase Stock Volatility?

We have a normal calendar for economic data. There will be important news will come from corporate earnings reports. Since this earnings season is part of an inflection point – the end of the earnings recession– it is special. That said, the uncertainty over policy change has market observers both divided and on edge. I expect the earnings news to get less attention than normal. With the queasy, uncertain feeling, the pundits will be asking:

Will policy uncertainty lead to greater stock volatility?

Last Week

Last week the economic news was strong, but with little reaction from stocks.

Theme Recap

In my last WTWA I predicted a close watch on earnings to see if these reports confirmed the improvement in economic data. There was plenty of attention to earnings, but not much on the economic strength theme. Pundits loved to discuss the various Trump appointees and speculate on the stock implications. At some point the market will refocus on the regular themes. For now – like it or not – the Trump effect is a big part of the daily discussion.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. As has been the recent case, both the range and the weekly change were very small. Doug attributes the Friday pullback to an Inaugural Address that offered little for the wealthy. He offers more analysis in his commentary. (Personally, I do not find any of the moves big enough to merit discussion, but there was plenty of commentary).

Doug has a special knack for pulling together all the relevant information. His charts save more than a thousand words! Read his entire post for several more charts providing long-term perspective.

Personal Note

Since I will be enjoying a Winter weekend away with Mrs. OldProf and friends, I will probably not write next weekend. As always, I’ll be watching, and may post a brief update if it seems necessary.

The News

Each week I break down events into good and bad. Often there is an “ugly” and on rare occasion something very positive. My working definition of “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!

This week’s news was again quite good—almost all positive. I make objective calls, which means not stretching to achieve a false balance. If I missed something for the “bad” list, please feel free to suggest it in the comments.

The Good

Industrial production rose 0.8%. This beat expectations of 0.6%, but the prior month was revised lower by about the same amount. This series is difficult to interpret in the short run.

Philly Fed improved to 23.6 versus the prior month 21.5. This is an exceptional gain for two consecutive months in a diffusion index. It handily beat expectations of 16 or so.

Initial jobless claims fell yet again. The series is now at the lowest level since 1973. To my surprise amazement, some of the punditry is actually finding a way to make this into bad news!

Inflation is higher. I understand that many view this as bad news. At some level, it would be. At a time when deflation (more dangerous and harder to fight) has been threatening, a modest rate of inflation is preferred. Scott Grannis has the story, and good charts on other data as well.

Homebuilder confidence remains strong. Calculated Risk, our go-to source on all things housing, notes that the reading was “below consensus, but another solid reading.” Anything over 50 indicates that most builders view conditions as good.

Housing starts showed a big increase, but mostly because of multi-family. The volatile series remains in the range Bill McBride predicted at the start of the year (4% to 8%). The actual was 4.9%, so the bottom end of the range. More encouraging is that multi-family was down 3.1% for the year while the gains came from the 9.3% increase in single-family.

The Bad

Building permits had a slight decline to a seasonally adjusted annual rate of 1,210,000. This is down 0.2% from last month but a gain of 0.7% over last year. I tend to place more weight on this series than most other analysts, so I watch it closely.

Earnings season began on a soft note. Both earnings and revenue surprises are below the long-term averages. Only 12% of the S&P 500 companies have responded so far, and there is specific sector concentration. I’ll save the charts until we have more data, but you can check for yourself at FactSet. Also, see specific company comments from Avondale, which follows the conference calls.

The Ugly

California budgeting. I have criticized my own state (Illinois) so often. This week the award goes to California for a $1.5 billion “math error.” Put enough of these together and you eventually have real money. (Everett Dirksen).