‘The Spirits Are Down’

A handful of headlines sounded promising on Thursday, but by and large, they belied recycled stories — updated versions of the prior day’s news flow.

I was afraid of this. Sometimes it’s the quiet weeks “that get you,” as I put it while previewing this week’s sparse data docket. Other times, though, the quiet weeks are just drowsy drudgery.

It looked, for a session or two, like we might be saved from the slog by an invigorating selloff. But large losses logged Monday and Tuesday gave way to an annoying nothingness. Stocks tried for a late-day rebound on Thursday. It felt asinine.

Continuing claims were worth a mention. I guess. They rose the most in a year during the week to November 26, reaching the highest since February in the process (simple figure below).

That’s hardly pulse-pounding, but it was possible to make a mountain of the molehill if you were so inclined.

Bloomberg’s Cameron Crise (who’ll find you some statistics if it’s statistics you seek) noted that when continuing claims are 27% higher from the minimum seen over the past year, it bodes ill.

If you enjoy detaining data series and waterboarding them until they give you the answers you want, I suppose that’s a useful statistic. Over the past 50 years, that “threshold” (as Crise called it) was always associated with recessions (figure below).

Not only that, Crise’s colleague Simon White observed that initial claims are approaching a “threshold” of their own. The percentage of states with rising claims is going up “fast.” That’s bad. Because, as White wrote, “once the percentage of states with rising claims goes through 20%, it often goes to 50%, and then a recession is, historically speaking, all but guaranteed.” As Brian Fantana famously put it, “60% percent of the time, it works every time.”

Golf clap for the efforts, gentlemen. If you toss in a reference to the low response rate both for the monthly jobs report and the JOLTS figures, you can make a case that the US labor market may be far less robust than it appears on the surface. But then, doesn’t that mean a Fed pivot is closer? If so, isn’t that bullish? This stuff is so hard!

Don’t worry, though. Jim Paulsen’s got the inside line. “The lows are in,” he told Bloomberg on Thursday. “I think we are starting a new bull market.” The S&P, he ventured, will hit 5,000 within the next 12 months. Jerome Powell is “going to have to be wrapping it up pretty soon,” Paulsen mused. At least he’s willing to go out on a limb.

Speaking of people willing to venture out onto shaky limbs, Cathie Wood now says her funds offer investors a differentiated hedge. “A hedge against what?” one netizen who wasn’t feeling especially generous on Thursday wondered. “Gains?” (I despise social media snark, but I have to admit, that quip elicited a chuckle from your thoroughly disenchanted editor.)

Wells Fargo has an “Animal Spirits” indicator. Did you know that? Me neither. It’s constructed using five simple variables: The S&P 500, Conference Board confidence, the yield curve, the VIX and the economic policy uncertainty index. “These five variables capture actions of major economic agents while representing major sectors, and have the ability to shed light on economic agents’ expectations about the near-term economic outlook,” the bank declared, introducing the index in 2018. If the gauge is above zero, those “major economic agents” are optimistic. If it’s below zero, not so much. The figure (below) is a long history of the index.

As you can see, it’s currently negative. In fact, with November’s print, it’s been negative every month this year. “The mood is wrong, the spirits are down,” Wells Fargo’s economics team said, in a note dated Wednesday. Just think how low it’d be if it included the proximity of continuing US claims to Crise’s 27% threshold!

All of the above is just potpourri. I rarely resort to potpourri, and only on days when the news flow is nonexistent and I’ve exhausted my capacity to pen lengthy opinion pieces (which I did on two occasions Thursday).

While searching for quotable passages this afternoon, I ran across yesterday evening’s note from JonesTrading’s Mike O’Rourke. I was pleasantly surprised to find that he employed virtually the exact same language I used 12 hours later to describe Vladimir Putin’s nuclear threats.

“There was almost no market reaction to a headline that would have sent the market tumbling a year ago,” O’Rourke wrote. “Ukraine’s military domination of Russia over the past nine months appears to be relegating Putin’s rhetoric to a similar status of Kim Jong Un.”

O’Rourke and I are apparently on the same page about the market mood too. “Despite several interesting headlines, today proved to be a quiet trading day,” he said, of Wednesday. That’s precisely how I described Thursday above.