The sell-off yesterday is just about as broad as it gets. Some 94% of the companies in the S&P 500 dropped. Everything was hit hard. So, what does it all mean? It might seem incongruous, but in my mind it means little. When one actually reads the PMI report, as opposed to the headline that screamed, “The Largest Percentage Drop in 33 Years,” and another one that blared, “Grim Manufacturing Data and Dropping Auto Sales Sink Stocks,” one understands the fundamental reality is that the US economy is still moving forward.
True, the report showed decreases in all categories, but the survey also showed that the respondents felt optimistic and it clearly showed as well that the majority of industries surveyed are enjoying growth.
- A number of comments from the panel cite adverse weather conditions as a factor negatively impacting their businesses in January, while others reflect optimism and increasing volumes in the early stages of 2014.
- Of the 18 manufacturing industries, 11 are reporting growth in January
So much for the “grim manufacturing data.” As to the “dropping auto sales,” that too is explainable in terms of a nasty cold snap and huge snowfall hitting most of the country in January. Would you want to go out and buy a car in that or would you say, “Honey, let’s wait. We don’t need a new car right now.”? Now regarding the actuality of car sales …
- Toyota’s (TM) FQ3 net profit jumped over fivefold to ¥525.4B ($5.2B) from ¥99.91B a year earlier as net revenues increased to ¥6.585T from ¥5.32T. The Japanese car giant raised its fiscal-year outlook for the third time in three quarters, saying it now expects net income to almost double to a record ¥1.9T ($18.8B).
Back to the 11 of 18 industries showing growth … As a trader or investor, you might be interested to know which industries are experiencing growth and which are not. Well, as good fortune goes, I just happen to have the information right here.
- Plastics & Rubber Products, Primary Metals, Textile Mills, Wood Products, Printing & Related Support Activities, Fabricated Metal Products, Electrical Equipment, Appliances & Components, Transportation Equipment, Machinery, Furniture & Related Products, and Food, Beverage & Tobacco Products.
The industries showing contraction are as follows.
- Nonmetallic Mineral Products, Petroleum & Coal Products, Apparel, Leather & Allied Products, Miscellaneous Manufacturing, Chemical Products, Paper Products, and Computer & Electronic Products.
Okay, so manufacturing is not moribund and car sales are not falling off a cliff. Let’s see, what else can point to an over-reaction in the market yesterday?
- If we start seeing meaningful credit growth, it would only be a matter of time before that’s reflected in improved economic momentum. The missing piece of this recovery has been a sustained pickup in credit.
Okay, so if I understand, what has been missing from the economic growth of the past five years is “a sustained pickup in credit” and yet the recovery still happened. Again, if I understand it, a pickup in lending (credit) is a key to actually expanding economic growth. Did I get it right? Well, then …
- Banks in the U.S. saw increased demand from businesses and consumers for lending and in turn made those loans more readily available, according to a Federal Reserve report.
- The total value of loans at U.S. banks climbed 2.2 percent during the past year to $7.39 trillion as of Jan. 22, according to a Fed report last week. Lending to businesses has been particularly strong, with commercial and industrial loans climbing to $1.62 trillion, a 7.5 percent increase from a year earlier.
The market over reacting in times of the market already over reacting is not uncommon and it can happen whenever the market is looking for a reason to rebalance. The market started looking top heavy in December, so it went looking for a reason to rebalance. It found it in the Fed’s additional tapering, which led to an emerging market “crisis,” and then it continued with manufacturing data from China and the US that did not meet expectations for various reasons. Fear led to more fear and that led to panic selling and there you have it.
As always, though, if there is no legitimate reason for the fear and panic, the market will return to what it knows matters – company earnings.
- With earnings season halfway over, Thomson Reuters data shows that of the 250 companies in the S&P 500 index that have reported earnings, 69.7 percent have topped expectations, above both the 63 percent beat rate since 1994 and the 67 percent rate for the past four quarters.
Warning! A Strong Current Is Flowing.
Trade in the day, Invest in your life …
