So far so good this week with the market. September is opening quietly in the green. Not a bad start for the market, given its weak performance in August, the Syria issue, the mindset that QE tapering will kill the market in mid-September, and the potential for US political chaos toward the end of the month.
As I wrote yesterday, the reason for tepid movement in the green is the economic fundamentals. Today, the market received more of that continuing positive development.
- The U.S. economy expanded “at a modest to moderate pace” in July and August, the Fed’s Beige Book shows. Of the twelve districts, eight characterized growth as “moderate,” three said growth was “modest,” and Chicago reported “improved” activity.
The Beige Book carries a lot of weight in the Fed decision-making process, so expect more chatter about QE tapering that could move the market a bit toward the downside, as it did this morning after opening strongly in the green. Yet, keep in mind, the same data that moves the Fed toward tapering is the same data that moves the market toward the green, eventually.
- In another report, the Federal Reserve said strong demand for autos helped keep the economy on a “modest to moderate” growth path in recent weeks, an assessment that leaves the door open for a reduction in the central bank’s bond purchases.
It is hard to minimize the reality of increasing auto sales in the US. Not only are the companies solid trades or investments, but the effect on the economy is tangible. Across the board, more cars sold means more repairs, parts, accessories, insurance, and factory output to keep up with demand.
- Auto sales are a key leading indicator of consumer spending, which accounts for about 70 percent of U.S. economic activity. Auto sales rose 17 percent last month to a seasonally adjusted annual rate of 16.1 million units. That was the fastest pace since October 2007 and beat the 15.8 million-unit rate analysts surveyed by Reuters had expected.
It is also difficult to minimize the current strength of auto sales, as the data are just numbers, but when you bring those numbers into focus relative to the personal, well, the story sharpens quite a bit.
- “It hasn’t been like this since the ’80s,” one auto dealership owner tells WSJ, referring to soaring domestic demand for autos.
The Beige Book report, the good auto sales news, and all of the other global economic data, are all signs that point to the beginning of the end for the Fed bond-buying program. Add to that the fact that employment is holding steady and unemployment is dropping slightly.
- The number of Americans filing new claims for jobless benefits fell last week to a near five-year low, a sign of economic health that could help convince the Federal Reserve to wind down a bond-buying stimulus program.
Believe it or not, this is all good news for the US economy and the market. Think about it. How long can the Fed keep buying bonds? It has to end, and the reason it is ending is the US economy is getting stronger. The market understands this, as evidenced by the IPO market.
- The IPO market is on track for its busiest year since the financial crisis. Investors point to a flood of cash into stock mutual funds and what many view as reasonable valuations relative to annual profit.
Yet, even as the US economy is the prime mover of the global economy, the US Fed decisions do affect the outside world.
- Chairman Ben Bernanke triggered a selloff in emerging market currencies, stocks, and bonds and a flight to the dollar when he in May raised the possibility of winding down the Federal Reserve’s $85 billion per month bond-buying program.
- Russia and China warned on Thursday that the end of the U.S. Federal Reserve’s bond-buying program could have a profound impact on the global economy and urged caution.
The question is this: Is the chatter about QE tapering and its influence on emerging markets meaningful to the market? So far, not so meaningful, but that could change as well. Keep it in mind, but, and as well, keep the positive US economic data in mind.
- Same-store sales at Costco rose 4% in August, topping analysts’ expectations of a 3.8% increase. The retailer said net sales for the month came in at $7.95B, a 7% Y/Y increase.
September still has some turbulence ahead, but hang in there.
Trade in the day; Invest in your life …
