Another US economic data point I’d like to share in graphical form. The graph of the S&P 500 index vs the year over year percentage change in US Durable Goods Orders tells the same story as the previous post (see US Equities vs Industrial Production). Simply, the fact that US equities continue to defy the weakness in the US economic data.
Remember, most of these government produced economic data series are “sample models”, and though they generally get the direction of trends correct, there is a measure of statistical error that allows for variability in the absolute level (uncertainty in the error vs what’s really going on). Part of the reason why the previous economic numbers are consistently revised from month to month. The conspiracy buffs complain that 90% of the time, the economic data gets revised downward instead of the revisions running 50% up and 50% down over time as one would expect if the error in the model was truly random. No one ever pays attention to the downward revisions in the economic data, except for the people over at the Zero Hedge blog who have some excellent posts on this particular topic of revised economic data. That’s enough statistics.
The concerning issue with this particular graph is that the US Durable Goods Orders have already reached a low enough year over year growth level coming from a previous year over year growth peak to suggest the US economy could be in recession at the current time.
Next week the government will report November 2012 Durable Goods Orders and the Wall Street consensus has Durable Goods Orders for November 2012 increasing about +0.2% month over month, after a revised month over month increase in October 2012. Ex-Transportation (planes and cars, etc.), Durable Goods for November 2012 is expected to decline month over month.
Courtesy of St. Louis Fed Research and Data: S&P 500 Index vs YoY % Chg in US Durable Goods Orders
One can see there are just two previous recessions (not enough events or time to measure statistically with certainty) to measure this year over year growth Durable Goods Orders data series against. Again, it’s concerning that at this year over year growth level (+2.8% year over year for October 2012) on the down slope of the previous growth peak, the two previous recessions had already started. The Durable Goods data series has already seen a negative growth data point event for year over year growth back in August 2012.
It is entirely possible that the US Durable Goods performance is just in the lower end of the year over year growth range and the overall US economy is still growing in the 1% to 2% range as measured by real GDP that we’ve been seeing for too long now(real GDP is a terrible way to measure the economy, but that’s a topic for another day). Hopefully that is the case, as 1% to 2% real GDP growth is better than economic contraction for all of us.
While continually observing economic data points like the performance of US Durable Goods, combined with equity market valuation conditions like the present time (high relative to the historic range for normalized 10 year trailing earnings, along with several other proper valuation measures), and knowing what past history indicates for the poor performance of the stock market on average (nothing is certain) under these conditions. I have to bet (on average) that the best course of action is to avoid taking on the risk of owning most US stocks. At least avoid the risk without a downside hedge if you have to be on the long side trade in equities.
This environment also presents (and will continue to turn up) some good trading opportunities, both on the short and on the long side for those that do the proper investment research and analysis.
Until next time.