Wednesday, March 21, 2018

Animal Spirits Remain Spirited

It has been almost a year and a half since the election victory of President Donald Trump on November 8, 2016. The surprising upset seemed to awaken the economy’s animal spirits. They remain aroused. The soft data, based mostly on surveys, remain strong. On the other hand, the hard data, based on business cycle indicators, remain mixed.

However, the hard data that matter most to the stock market, i.e., earnings, remain bullish. The hard data that are the most important to the Fed and the bond market are dotted with soft patches, which augur for a continuation of the Fed’s gradual normalization of interest rates. Without any further ado, let’s have a closer at the hard soft data:

(1) CEOs’ optimism is flying. I described the mood of corporate managements during the Q4-2017 earnings season as “giddy.” I listened to several earnings conference calls during January and read the transcripts for all 30 DJIA companies’ calls. Managements were elated by the cut in the corporate tax rate at the end of last year. Their elation was confirmed by the Q1-2018 CEO Outlook Index compiled by Business Roundtable. It jumped to 118.6, the highest on the record for this series, which started during Q1-2003. It is very highly correlated with the yearly percent change in capital spending in both nominal and real terms.

(2) Small business owners are euphoric. The NFIB Small Business Optimism Index was 107.6 during February (the second-highest reading in the 45-year history of the survey), up from 94.9 during October 2016. The net percentage of respondents agreeing that now is a good time to expand jumped from 9.0% during October 2016 to 32.0% during February, the highest in the history of the series, which starts in 1974.

(3) Purchasing managers reporting robust growth. The M-PMI rose to 60.8 during February, up from 51.8 during October 2016 and the highest since May 2004. This index happens to be highly correlated with the y/y growth rate in S&P 500 revenues per share, which jumped to 9.4% during Q4-2017, the highest since Q3-2011.

(4) Consumer sentiment is upbeat. The Consumer Sentiment Index rose during the first half of March to 102.0, the highest reading since January 2004. It was 87.2 during October 2016, just before the election. It was led by a jump in its current conditions component to a record high of 122.8. It was 103.2 just before the election.

The Weekly Consumer Comfort Index (WCCI) has been hovering around 56.5 over the past five weeks. It’s up from 44.6 at the end of October 2016. It’s the highest since February 2001.

(5) Boom-Bust Barometer is hot. Often in the past, I’ve stir-fried the WCCI with my Boom-Bust Barometer (BBB) to derive my Weekly Leading Index (WLI). I derive my BBB as the ratio of the CRB raw industrials spot price index and initial unemployment claims. It rose to a record high in late February. So did my WLI, which has been very highly correlated with the S&P 500 since 2000.

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