Today was an unusual day in the stock market because the S&P 500, Dow, and Nasdaq all hit a record high even though there was very bad economic data released. The Dow had its best week since December. Even the Russell 2000 has been getting in on the party. The Russell 2000 is up 5.48% year to date which means it’s now only 21 points away from its record high set in July. This is one of the best years for stocks globally and now the small caps are along for the ride. It’s weird to see the small caps improving just when the U.S. economic data is swooning because you’d expect the small caps to be more tethered to the domestic economy. At this point bulls have a dual defense against any bad news. Before, it was the Fed would be dovish if economic data was weak, so it made sense to buy stocks. Now the bulls blame weak economic results on the natural disasters and the Fed is a backup plan.
Not only was the S&P 500 up this week to a new record high, but it was also not volatile as this VIX closed at 10.17. As you can see from the chart below, the 3-day intraday range for the S&P 500 was 0.26% which is the lowest ever. Even in September, which is the most volatile month of the year, the S&P 500 is barely moving. The average VIX in September so far has been 11.10. That’s the lowest average VIX for a September since 1990 when the VIX started being calculated. The second lowest was 12.06 in September 1995. The North Korean missile strike caused stocks to fall in the futures market, but by the time they opened the next day all was calm again.
The economic reports effected by hurricane Harvey started to come in this week and the results were brutal. The industrial production report showed a 0.9% decline in August which was the worst decline since May 2009. As I said would happen, this report was completely ignored by the stock market because it was blamed on hurricane Harvey. Economists at the Fed said the report was pushed 0.75% lower by the hurricane. That means the report would have been -0.15% which is below the expectation for a flat report, but isn’t close to being the worst one since the last recession. Auto production was up 2.2% in August after falling 4.2% last month. This isn’t caused by an increase in demand as sales have been down. Some companies may have decided to produce more cars in anticipation of demand which will come from people who need to replace their destroyed cars. Capacity to utilization fell to 76.1% from 76.9%. This shows the slack in the economy expanded. That’s not surprising given the sharp drop in industrial production. It might rebound in October when the storm effects are over. It will be important to only focus on year over year numbers and not sequential numbers then because August and September have storm effects in them.
The retail sales report was another weak one which was impacted by the hurricane as sales fell 0.2% which missed expectations for a 0.1% gain. Motor vehicle sales fell 1.6% which was the biggest decline since January. As you can see, the production increase didn’t match the sales decline possibly because of the anticipation of a boost from car replacement. On a year over year basis retail sales were up 3.2%. The 3.3% annualized growth rate in Q2 is what drove Q2 GDP to be 3.0%. Interestingly, sales at online retailers fell 1.1% which was the biggest decline April 2014. It’s tough to see what drove that. It may just be a quirk in the data considering the powerful growth we’ve seen in online all year. Restaurant and bar sales were up 0.3% which is surprising given the dreadful past two years for restaurants.
Now we are seeing the impact on the GDP tracking estimates from hurricane Harvey. This will only get worse in the next few days as even more negative reports come out. Then there will be a new bump lower from hurricane Irma which could possibly send the GDP growth below 1%. As you can see from the chart below, the Atlanta Fed’s tracking report took a tumble, falling from 3.0% to 2.2%. The estimates for real consumer spending growth and real private fixed investment growth fell from 2.7% and 2.6% to 2.0% and 1.4% respectively. These impacts were based on the reports we reviewed in this article.
As you can see from the chart below, the NY Fed’s forecast took a sharp hit as well. This is the worst decline we’ve seen in this forecast in a while. Unlike the GDP Now report, this one usually isn’t volatile because it usually starts at near 2% instead of near 4% which the Atlanta Fed starts at. As you can see, the NY Fed has already fallen to a 1 handle as it’s at 1.34%. I am predicting this forecast to fall below 1% in the next 2 weeks. The one bright side to this negativity is the Q4 estimate is likely too negative. It doesn’t realize this sharp weakness is temporary. In fact, Q4 should see a boost from rebuilding, so I’d argue the 1.82% estimate is way too negative. Even the very bullish St. Louis Fed lowered its Q3 forecast to 2.60%. This makes the average of the 3 forecasts 2.05%
Conclusion
The reports for the next few weeks will be meaningless because the hurricanes are bringing them lower. The hope is some economists will be able to determine the effect of the hurricanes so we see how the economy is doing in the non-storm ravaged parts of the country. There’s also the potential for another tropical storm to impact the northeast, but that wouldn’t be as bad as the prior two storms this season. Either way the market is taking this data in strides as volatility plummets.
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