Macro data: Robust economic growth; Microdata: Not so much

Stock markets continue to climb ever higher (up more than +1% week-on-week), with both the S&P500 and DJIA closing at new record highs on Friday (on very light volume).

On the technology side of the market, five of the Magnificent 7 were in the black this week, with AAPL closing at an all-time high of $237.33. Meanwhile, market favorite Nvidia and Elon Musk’s Tesla each lost more than -2%.

The magic of seasonal adjustment

The macroeconomic data such as GDP and retail sales show us that the economy is still healthy. Also the employment data, although the October numbers looked weak (November employment data will be released next Friday, December 6th).^Th). Weekly initial jobless claims for the week ending November 23 are at 213,000^approxappear to be the same as a year ago on a seasonally adjusted (SA) basis. What is concerning is the non-seasonally adjusted (NSA) data on initial claims. According to the Labor Department’s weekly press release, this is last year’s NSA figure for the week ending November 23rd^approx was just under 200,000. This equates to 213,000 on a SA basis. This year’s raw number from the NSA for the same week in November was 243,000. But somehow, through the magic of seasonal adjustment, that number also came to 213,000 on a SA basis. Was it the fact that Thanksgiving was a week later that year that caused the anomaly?

Living in the gutter

The overall health of the economy and the housing sector are closely linked, with the housing market often acting as a leading indicator. It is therefore worrying that both existing and new home sales in this sector remain near decade lows.

Of course, one of the reasons for the poor performance is that housing affordability is currently lower than it was during the Great Recession. This is due to high real estate prices and high interest rates.

Other indicators show weakness

Other indicators we monitor include the Conference Board’s Leading Economic Indicators (LEI), the Chicago Fed’s Industrial Production Index, and the National Activity Index. As shown in the charts below, they have all been predicting an economic slowdown/recession for some time. We don’t believe the business cycle is dead. So it seems to us that the new Trump administration will have to contend with a weakening/recessive economy.

Bankruptcies are also increasing. For the year ending September 30th^ThIn total, there were almost 23,000 bankruptcies, an increase of 74% compared to the same period in 2022 (two years ago). The last time bankruptcies were this severe was during the Great Recession (’08-’09).

Additionally, we can see from the company’s third quarter results and comments from management, particularly from major retailers, that the consumer is struggling.

• Best Buy’s same-store sales were -2.9% lower year-over-year, and management expected a number lower than 2023 (full-year sales decline -3.0%);
• Kohl’s lowered its full-year forecast to -6.5%;
• Target said: “Consumers tell us their budgets continue to be tight. They…focus on deals and then replenish their supplies when they find them.”
• As a sign of the times, we note that price wars have broken out in the fast food industry, which is usually a sign of consumer weakness.

Accordingly, retailers are not expecting a strong Christmas sales period. We notice that Black Friday sales are no longer limited to one day (the Friday after Thanksgiving) but have been going on for several weeks. The graphic shows the low expectations for Black Friday retail sales.

We will know more on Monday (December 2nd).^nd), when initial Black Friday spending is initially estimated.

Interest rates

Interest rates were in a steep downward trend through September on expectations that the Fed would quickly scale back its overly restrictive policies. However, after the election, interest rates rose nearly 80 basis points, from 3.65% on the 10-year Treasury note in mid-September to 4.45% in mid-November, as the market feared the president-elect’s tariffs and other policy initiatives stoke inflation again. Compounding the rise in yields were various voices from the FOMC suggesting that markets were pricing in rate cuts faster than many FOMC members could justify.

As shown in the 10-year Treasury yield chart, these fears peaked in mid-November and 10-year Treasury yields fell to just over 4.17% at the close of business on November 29th^Th.

In our view, the economy is less robust than many believe and interest rates will fall faster than the bond market is currently pricing in.

Final thoughts

Stock markets continue to rise, with the DJIA and S&P 500 hitting new record highs on Black Friday. Over the week, five of the Magnificent 7 rose, with market favorite Nvidia and Elon Musk’s Tesla each down more than -2% for the week. By any historical measure, the stock market remains in bubble territory.

We also find it worrying that while most macroeconomic data says the economy is strong, micro data does not support this. For example, the Conference Board’s leading indicators warn of difficult times ahead, as do the Chicago Fed’s National Activity Index, the Industrial Production Index, and the rising number of bankruptcies.

Retailers aren’t seeing a bright year either, anticipating the slowest growth in holiday spending in six years, a rate only about in line with inflation.

For various reasons, interest rates rose by 80 basis points from mid-September to mid-November. To us it looks like they have peaked and we expect them to fall faster than bond markets have priced in. Much of the decline has to do with our view that the Fed will cut interest rates faster than is currently priced in.

(Joshua Barone and Eugene Hoover contributed to this blog.)