The equity market may have surged off its March lows, but the actual fundamentals paint a pretty bleak picture
By David Rosenberg and Andrew Hencic
To help alleviate all the confusion over whether the United States economy is actually out of recession and into a full-fledged and reliable recovery, we have constructed a new Boom-Bust index that measures exactly where the economy is operating relative to some semblance of normality.
The index is based on a set of seven economic and financial indicators and is designed to judge whether economic performance is more similar to an average economic boom or an average recession. What it currently shows (with all due deference to the increased risk appetite through the spring and summer courtesy of unprecedented fiscal stimulus and massive market-price distortions by the U.S. Federal Reserve) is that the economy, sad to say, is really not out of its recessionary state; at a minimum, it shows that we have a long way to go to get back to anything that can be remotely called a pre-COVID-19 norm. This, in turn, tells us that if you are prone to being long the pro-cyclical reflation trade that is so contingent on a vaccine, it’s best to wait for this to become a trend rather than a trade… or, more than likely, a value trap.
We based our index on something called the “Mahalanobis distance,” which was introduced for economic purposes by recent research out of the Massachusetts Institute of Technology (A New Index of the Business Cycle by William Kinlaw, Mark Kritzman and David Turkington). We then deployed seven different macroeconomic and market-price indicators at a monthly frequency: the original four used in the paper (industrial production, the U.S. 10-Year T-Note/Fed funds rate spread, nonfarm employment and the S&P 500) supplemented with initial unemployment claims, single-family housing construction permits and the Conference Board’s consumer expectations index.
From a technical perspective, our definitions of “booms” and “busts” are the same as those from the MIT report: a bust is a technical recession as defined by the National Bureau of Economic Research, and a boom is a period where the year-over-year growth rate in industrial production is in the 75th percentile of the past 10 years.
The index is centered around 50, which corresponds to an economy that is neither running “hot” nor “cooling off.” A value of less than 50 means that the indicators are showing more features of a recession than a boom period (a value of zero is when the indicators are fully pointing to recession). Values above 50 mean the economy has more in common with solid growth, while a value of 100 would be a consensus that a boom is ongoing.
The index is responsive to the start of recoveries, as it jumps quickly back to values close to 50 at the conclusion of recessions (with the tech wreck and Great Financial Crisis taking slightly longer). However, the six-month trend performs quite well in anticipating recessions (values below 50 have preceded every recession since 1980 with the notable exception of 2015-2016) and with turning points off the lows that signal the resumption of growth.
The current value and six-month trend both sit at zero, firmly planting conditions as of September’s data in the Bust category. Going back to the late 1970s, the only other time the six-month average has hit these lows was in the later stages of the Great Financial Crisis. Though, with initial jobless claims still more than 750,000 per week, and nonfarm employment at -6.4% year over year (still worse than any period since the demobilization after the Second World War), this really shouldn’t be much of a surprise — the bulls, for some reason, see making up lost ground with unprecedented stimulus as the primary reason for being positioned with a pro-cyclical bias. Meanwhile, the debt overhang that caused the 2009-2019 economic expansion to have been the weakest in the past seven decades has only become worse and represents a massive tax liability and constraint on aggregate demand for the foreseeable future.
The equity market may have surged off its March lows, and credit spreads sharply tightened on both real and pledged Fed intervention, but the actual fundamentals paint a pretty bleak picture. Activity is still severely depressed and with COVID-19 cases reaching another daily record last week, it may be some time before things turn around.
In the face of this uncertainty, a portfolio positioned defensively — including Treasuries, gold and equities that trade with “utility-like” characteristics and have reliable dividend growth characteristics — is a prudent strategy that mitigates downside risks, but has the ability to capture upside potential, as economic growth prospects are very sluggish and inflation risks are still low alongside a massive resource gap in the broad economy.
David Rosenberg is founder of independent research firm Rosenberg Research & Associates Inc. and Andrew Hencic is a senior economist there.You can sign up for a free, one-month trial onhis website.
Remarks by President Trump on the Economy – Whitehouse.gov
James S. Brady Press Briefing Room
12:31 P.M. EST
THE PRESIDENT: Well, thank you very much. And I just want to congratulate everybody. The stock market, Dow Jones Industrial Average just hit 30,000, which is the highest in history. We’ve never broken 30,000. And that’s despite everything that’s taken place with the pandemic. I’m very thrilled with what’s happened on the vaccine front. That’s been absolutely incredible. It’s — nothing like that has ever happened medically. And I think people are acknowledging that, and it’s having a big effect.
But the stock market has just broken 30,000. Never been broken, that number. That’s a sacred number: 30,000. Nobody thought they’d ever see it. That’s the ninth time since the beginning of 2020, and it’s the 48th time that we’ve broken records in — during the Trump administration. And I just want to congratulate all the people within the administration that worked so hard. And most importantly, I want to congratulate the people of our country, because there are no people like you.
Thank you very much, everybody. Thank you.
12:32 P.M. EST
China’s Li Sees Economy Returning to ‘Proper’ Range Next Year – Yahoo Canada Finance
The Canadian Press
NEW YORK — Best Buy Co. reported fiscal third-quarter results that blew through analysts’ expectations as the nation’s largest consumer electronics retailer enjoyed surging demand for items like home theatre and appliances that help people learn, cook, work and connect in their homes during the pandemic.
The Richfield, Minnesota-based retailer, said that third-quarter profits rose 33% while sales were up 21%. Sales at stores opened at least a year rose 23%, while online sales in the U.S. surged 174%.
Still, shares fell 5% in Tuesday morning trading as Best Buy warned that sales could slow down during the current quarter as the number of virus cases surge.
“As we start the fourth quarter, the demand for the products and services we sell remains at elevated levels, but similar to last quarter, it continues to be difficult for us to predict how sustainable these trends will be,” Matthew Bilunas, Best Buy’s chief financial officer, told analysts during the call. “In fact, we are seeing COVID cases surge throughout the U.S. and Canada at a time of significant holiday volume through our stores, online and supply chain. “
Bilunas also noted other factors such as potential government stimulus, the risk of continued high employment and the availability of inventory like computers to match customer demand.
Best Buy joins big box stores like Walmart, Target, Home Depot and Lowe’s in reporting strong fiscal results. Unlike mall-based stores and other businesses that sell non-essentials, big box retailers were allowed to stay open during the lockdown in the spring and have all seen their dominance increase as consumers focus on necessities and home-related activities.
Before the pandemic, Best Buy had expanded its services to such options as at-home consulting and same-day delivery. It also sped up its online shipping. But the pandemic has forced Best Buy to adjust its operations and launch new shopping experiences that provide more convenience and safety for customers.
Early fall, Best Buy began using 250 of its stores as fast-shipping hubs for online orders. It’s now adding 90 more locations during the holiday period. It says its goal is to have all 340 stores ship more than 70% of its ship-from-store units during the holiday quarter. It’s also testing new store formats as it transforms locations to fulfilment hubs.
For example, in four Minneapolis locations, Best Buy reduced its square footage for shopping to 15,000 square feet from an average of 27,000. The product assortment on the sales floor will still include the primary categories these locations featured before the remodel, but instead the focus will be on the most popular items, the retailer said. The remodels will result in increased space for staging product for in-store pickup and to help ship-from-store transactions, as well as provide the ability to stage inventory for items that may not be on the sales floor.
Best Buy reported fiscal third-quarter profit of $391 million, or $1.48 per share, compared with $293 million, or $1.10 per share, in the year-ago period. Earnings, adjusted for restructuring costs and amortization costs, were $2.06 per share.
The results exceeded Wall Street expectations. The average estimate of 11 analysts surveyed by Zacks Investment Research was for earnings of $1.76 per share.
The consumer electronics retailer posted revenue of $11.85 billion in the period, also beating Street forecasts. Eight analysts surveyed by Zacks expected $11.02 billion.
Shares fell $6.69 to $1150 in late morning trading. Shares have increased 39% since the beginning of the year, while the S&P 500 index has increased 11%. The stock has increased 69% in the last 12 months.
Elements of this story was generated by Automated Insights (http://automatedinsights.com/ap) using data from Zacks Investment Research. Access a Zacks stock report on BBY at https://www.zacks.com/ap/BBY
Anne D’Innocenzio, The Associated Press
German economy grew by 8.5% in third quarter, but recession fears grow – The Guardian
BERLIN (Reuters) – Germany’s gross domestic product grew by a record 8.5% in the third quarter as Europe’s largest economy partly recovered from an unprecedented plunge caused by the first wave of the COVID-19 pandemic in spring, the statistics office said on Tuesday.
The stronger-than expected rebound was mainly driven by higher household spending and soaring exports, the office said.
“This enabled the German economy to make up for a large part of the massive decline in gross domestic product caused by the coronavirus pandemic in the second quarter of 2020,” it added.
The reading marked an upward revision to an earlier flash estimate of 8.2% growth, and followed a 9.8% plunge in the second quarter.
The outlook is clouded by a second wave of coronavirus infections and a partial lockdown to slow the spread of the disease. Restaurants, bars, hotels and entertainment venues have been closed since Nov. 2, but shops and schools remain open.
Chancellor Angela Merkel and regional state premiers are planning to extend the “lockdown-light” on Wednesday until Dec. 20, according to a draft prepared for their meeting.
A contraction in the service sector is expected to weigh heavily on gross domestic product in the fourth quarter, while lockdown measures in other countries are likely to hit export-oriented manufacturers as well.
DIW economist Claus Michelsen said a decline in economic output was therefore on the cards, with initial estimates indicating a GDP drop of around 1% in the final quarter.
“Germany and many important trading partners are likely to slide back into recession,” Michelsen said.
(Reporting by Michael Nienaber and Rene Wagner; Editing by Riham Alkousaa and EKevin Liffey)
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