As I've often discussed, the stock market is an amazingly accurate barometer of future economic activity: The market sniffs out the good and bad far in advance, likely six to eight months out. For us, as traders and investors, it is hard to think more than six to eight minutes ahead. But if we step back and look at the bigger picture, we can see some very positive developments for the future -- yes, even with the political wrangling in Washington on the horizon.
I look to several reports when I'm forming an opinion on the economy -- and, in turn, the stock market, especially since many of the indicators are forward-looking as well. Of these, I particularly prefer the ones with little noise that represent various areas of the entire economy. Let's briefly go over them one by one.
On the domestic side, the most important report is industrial production. This is a great leading indicator of economic strength, or lack thereof. While recent trends here have been solid, they are not strengthening -- though production is at a pretty decent level. The purchasing managers index (PMI) ties into this one, and its most recent trend is higher; and the Institute for Supply Management report has also shown robust growth. (Do know that many other indicators trickle down from the ISM repot, so when it does turn down, it's a very important warning sign.)
Next up is retail sales, which have been unusually resilient of late. It's like that old truism -- never count out the consumer. The holiday shopping season was a success for most retailers, and now we head in to a slower pre-summer period.
Home sales, starts and permits make for a great indicator, as well, as the housing sector's tentacles reach many other areas of the economy. From jobs to lumber to copper and Home Depot (HD) sales, the housing-market renaissance has been a major contributor to the U.S. recovery. The sector's resurgence should continue through 2013. The solid numbers here also reflect a favorable interest-rate environment, courtesy of the Federal Reserve -- from which the banks are taking benefit, as well, as they start to loan to consumers and businesses.
Other important catalysts can be found in factory orders and durable goods, as they reveal inventory levels, restocking and ordering trends. Also important, of course, are employment figures. While jobless claims and the monthly employment data are a bit noisy, both paint a decent picture after the numbers have been smoothed out, and after we've taken into account revisions from prior months. Jobs growth is not as robust as many would want -- this is a Veruca Salt world, after all -- let's remember that this is a very big economy, and small moves must lead to lead to bigger ones.
Finally, let's talk earnings. Much has been made of a downturn in the next earnings cycle but, frankly, the recent data are not showing it. Earnings acceleration and growth are trend figures, and the turn higher may be occurring right now. According to Stephanie Link, co-portfolio manager of Action Alerts Plus, the third quarter came in lower by 5% for companies on the S&P 500. But, as it stands so far, the fourth quarter is showing a healthy 6.5% growth vs. 2011. Revenue is up a modest 2.2%, as well, with two-thirds of the companies beating estimates. This is even despite Hurricane Sandy, which reduced economic activity in affected areas.
So, all in all, the economic data are showing some positive trends. U.S. gross domestic product is expected to grow at 2% to 2.5% this year, but if these trends continue, we may get to the 3% area or even 4%. In my next piece, I'll talk about the strong current trends overseas, and how they could boost domestic performance.