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Economic data always threaten to bear us back, like "boats against the current" in the closing line of F. Scott Fitzgerald's The Great Gatsby, ceaselessly into the past.
Such was the case this past week, when a surprisingly weak initial gross domestic product report showed that the American economy grew at an annualized rate of just 0.2 percent in the first quarter. Fresh concerns about the economic recovery ensued, sending stocks on a roller-coaster ride and recalibrating expectations about the economy.
But the most important use of backward-looking data is to sketch out what the future may bring. And the outlook for the American recovery may be bright indeed.
Thursday brought two very encouraging signs about the labor market. Initial unemployment claims fell to 262,000 for the week ended April 25th, the lowest reading in 15 years. And in the more backward-looking employment cost index, U.S. wages were shown to have risen by 2.6 percent in the first quarter versus the year prior.
On Friday, investors should get a decent flavor of how the past month shaped up, when the April employment report is released. Many economists are expecting to see positive signs in the report.
"Given the sturdy trends in jobless claims and tax receipts, we expect a meaningful rebound in April employment," wrote Joe LaVorgna, chief US economist at Deutsche Bank, in a Friday note.
More generally, the fact that GDP has tended to disappoint in the first quarter—only to bounce back substantially in the second—is a trend that has been lost on few.
For instance, final GDP in the first quarter of 2014 (which fell considerably from the initial reading) came in at negative 2.1 percent; the Q2 reading that followed showed 4.6 percent annualized growth.
An analysis by CNBC's Steve Liesman found that over the past 30 years, annualized first-quarter GDP growth has come in at 1.87 percent while the economy has grown 2.7 percent. That was statistically significant enough to lead the GDP tabulators at the Bureau of Economic Analysis to remark to CNBC that "BEA is currently examining possible residual seasonality in several series."
The S&P 500 is 2 percent from its all-time high, but one top technician says there's more to the charts than meets the eye.
On Tuesday's "Futures Now," Altaira's director of technical analysis, Ralph Acampora, said the market is in a "stealth correction."
"The market is frenetic here. What I see is a two-tier market," said Acampora. "Under the surface there are some issues not doing well at all."
He noted the performance of large-cap stocks has trailed that of small- and mid-cap stocks. The Russell 2000 is up nearly 5 percent year to date, while the S&P 500 is up 1 percent over that time.
But most troubling to Acampora is the underperformance of the transports, which have badly trailed the S&P this year. "The Dow Jones transportation average peaked in December of 2014 and hasn't made a new high this year," he said. "For those who follow the old theory, the market is on hold."
To note, the "Dow Theory" is an old technical indicator in which investors believe that if the industrial or transportation average were to make a new high or low, the other would follow suit. According to Acampora, the Dow Jones industrial average would need to fall below 17,089 in order for this theory to come to fruition, and it could lead to a 5 to 10 percent correction.
While crude oil has surged nearly 40 percent from its recent lows, natural gas has remained in the dumps, falling 4 percent on the year despite Thursday's sharp 5 percent rise. But according to one highly regarded technician, a confluence of seasonal factors and overly bearish sentiment could set the stage for an even bigger rally to come.
On CNBC's "Futures Now," Jonathan Krinsky said natural gas is on the cusp of experiencing a major "short squeeze" that could send the commodity up another 10 percent to $3 per Btu.
"While the structural chart is firmly bearish, we think a countertrend rally could be underway," said Krinsky, market technician at MKM Partners, on Thursday.
Most traders don't expect to glean any significant market-moving insights from the Federal Reserve's policy statement due Wednesday afternoon. But those traders risk getting caught unawares by a less-dovish-than-expected Fed, says George Goncalves, head of U.S. rates strategy at Nomura.
Referring to the Fed statement, Goncalves wrote in a Tuesday afternoon note to clients that "given market positioning and pricing, the risk is that if it sounds less dovish (or even neutral) the market will be offside."
In addition, Goncalves notes the risk that the Fed strikes a more optimistic tone about the economy, after the central bank wrote in its March statement that "economic growth has moderated somewhat."
"If it were to attribute the weakness in the economy as being backward looking, watch out!"
In other words, the statement could clarify that the Fed's thoughts on the economy moderating was an observation about the past, not a prognostication about the future. If the Fed is more optimistic about growth, that would give the central bank a reason to think about normalizing monetary policy sooner rather than later.
Either way, it will be interesting to see how the Fed reacts to Wednesday's surprisingly weak gross domestic product number, which showed the economy growing just 0.2 (annualized) in the first quarter.
The bottom line of earnings season adds up to this: companies are running into big trouble with their top lines.
While companies generally tend to beat both earnings and revenue expectations, this year more have missed their first-quarter top-line estimates than beaten.
Out of the first 201 S&P 500 Index companies to report first-quarter earnings, only 47 percent have beaten revenue estimates, according to FactSet. If this number holds, it will be the first time that more companies have missed than beaten earnings expectations since the first quarter of 2013.
Now, analysts on the whole expect to see S&P 500 revenue fall 3.5 percent year-over-year, whereas they had expected just a 2.6 percent drop when the first quarter ended.
Meanwhile, earnings have surpassed analyst expectations nicely, with 73 percent of companies beating earnings-per-share estimates, according to FactSet. That's equal to the five-year average percentage of beats.
If you're looking for value in U.S. stocks, you'd better look hard.
The S&P 500 Index's forward price-to-earnings ratio—the popular metric that measures how much investors are willing to pay for each dollar of expected future earnings—closed the week at 17.1, according to FactSet data. That's more than one-third higher than the P/E of three years ago.
Even with Friday's 1.1 percent drop, then, equities are not exactly at bargain level prices. (Tweet this)
"We're a value-driven shop, so everything we do is driven by the ability to acquire assets, stocks in particular, at a discount to intrinsic value," said Scott Clemons, chief investment strategist at Brown Brothers Harriman. "But there are precious few opportunities like that on the ground."
The S&P 500 is less than 1 percent from its all-time high, and according to one top technician, more records are just around the corner.
"We've already seen new, all-time highs registered by major indices in the U.S. and globally," said BTIG's chief technical analyst, Katie Stockton. "The S&P 500 has yet to do that, but I think it's a matter of time."
Stockton pointed out that despite a negative outlook for earnings, the initial reaction has been quite positive. "We're seeing breakouts [on earnings] on an individual stock level," she said. "The Russell 2000 has hit a new all-time high, and I think the S&P 500 is going to break out from what has become a bit of a triangle formation on the chart."
Are companies beating earnings expectations? Well, yes and no.
All eyes are on earnings this week, as investors eagerly await to find out how well American companies did in the first quarter of 2014. So far, fewer than 20 percent of S&P 500 companies have reported. But already, a few disturbing trends are emerging.
Of the 85 S&P companies that have already reported their first-quarter earnings, 67 percent have beaten analyst estimates on the earnings side, and 51 percent have beaten on the revenue side, according to FactSet. That sounds pretty good—until one considers that over the past four years, 73 percent of companies have tended to beat earnings estimates, and 58 percent have tended to beat revenue estimates.
It's not just the number of companies beating—the aggregate amount of earnings has been similarly light. Companies have reported earnings 2.0 percent above expectations, which is well shy of the 5.8 percent "surprise percentage" that companies have tended to report over the last four years.
The overall sales numbers have also been soft, with companies reporting revenue 0.3 percent below expectations in aggregate.
At this point, S&P 500 companies look to report a year-over-year earnings decline for the first time since the third quarter of 2012. By combining the earnings that have already been reported with the analyst estimates of the S&P 500 earnings we have not yet seen, FactSet senior earnings analyst John Butters arrives at a "blended" earnings decline estimate of 1.3 percent.
Is the economy actually picking up steam? Investors will get another indication this week, when cyclical giants like Caterpillar and Ford report earnings
"I'm looking at CAT, I'm looking at Ford, I'm looking at Microsoft. And I'm taking them all together and kind of putting them in the category of an economic datapoint from a macroeconomic standpoint," said Jim Iuorio of TJM Institutional Services.
He expects that the reports will give investors another reason to be optimistic.
"I think that it's going to be good, based on the fact that most of the numbers we've seen over the last couple of weeks have been pretty good," Iuorio said.
So far, earnings season has brought decent news. 65 percent of the S&P 500 companies that have reported have beaten earning per share estimates — which just slightly below the 71 percent average. On the revenue side, 51 percent of reporting companies have beaten.
Not only is long-term economic stagnation possible, but current conditions in the United States could lead to this nightmare scenario. That's the shocking conclusion presented by Brown University economists Gauti Eggertsson and Neil Mehrotra, whose recent paper, "A Model of Secular Stagnation," explains how secular stagnation could come about.
This flies in the face of the popular theory that long-term economic stagnation is not possible. After all, economic agents are expected to adjust to whatever the current economic conditions are, and once they do, the framework for growth should be laid anew.
But by adjusting economic models to allow for the fact that different groups have different needs, the two economists bring a new truth to light.
"In models in which there is some heterogeneity in borrowing and lending, it remains the case that there is a representative saver whose discount factor pins down a positive steady interest rate. But moving away from a representative saver framework to one in which people transition from being borrowers to becoming savers over time due to lifecycle dynamics will have a major effect on the steady state interest rate and can open up the possibility of a secular stagnation," Eggertsson and Mehrotra write.
Using complex models, the paper goes on to show why a "deleveraging shock," a "drop in population growth," or "an increase in income inequality" could all increase savings. And with a short-term nominal interest rate permanently at zero, the central bank will be "unable to generate a sufficient monetary stimulus because the nominal interest rate cannot be negative." Instead, the result is a "permanent drop in output."
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