The economic calendar is light and it is the start of the week-long Chinese New Year. This means some media time and space that must be filled. Needing an attention-getter, I expect the punditry to be asking:

Is a recession looming?

Prior Theme Recap

In my last WTWA I predicted that everyone would be talking about whether the stock market correction was over. That was one of the most frequent media topics for the week, especially at the lows on Wednesday and again on Friday. As expected, answers varied and we still don’t know for sure. The early-week strength, mid-week rebound, and Friday selling in Doug Short’s weekly chart. (With the ever-increasing effects from foreign markets, you should also add Doug’s weekly chart to your reading list).

Doug’s update also provides multi-year context. See his weekly chart for more excellent charts and analysis.

We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react. That is the purpose of considering possible themes for the week ahead. You can make your own predictions in the comments.

This Week’s Theme

Earnings season continues, but the economic calendar is light. Because of the Chinese New Year, we will not have stock or economic news from there. With plenty of recent economic data and scary forecasts to digest, pundits are pondering the worst. When that happens they ask everyone (regardless of qualifications) the same question:

Is a recession looming?

With economic data, especially in manufacturing, weaker than it was for most of 2015, many wonder what this portends. Listed below are popular bearish arguments from a variety of sources:

  • The recession has already started.
  • The stock market is clearly signaling recession.
  • Falling commodity prices have signaled a recession.
  • Declining oil prices have started a death spiral.
  • China economic weakness will drag down the rest of the world.
  • Emerging market weakness will drag down the rest of the world.
  • Energy company bankruptcies will drag down banks.
  • The Fed is out of bullets.
  • The bullish arguments are more concentrated in the economic community:

  • The economy shows only modest growth, but not a recession.
  • A U.S. recession has never resulted from global weakness.
  • Historically reliable indicators do not show a recession.
  • Key economic indicators followed in dating recessions have not peaked.
  • As always, I have my own opinion in the conclusion. But first, let us do our regular update of the last week’s news and data. Readers, especially those new to this series, will benefit from reading the background information.

    Last Week’s Data

    Each week I break down events into good and bad. Often there is “ugly” and on rare occasion something really good. My working definition of “good” has two components:

  • The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially – no politics.
  • It is better than expectations.
  • The Good

    On balance the news tilted to the negative side last week, but there were a few bright spots.

  • Federal receipts (and spending) are 3% higher. This is usually a positive economic sign. (CBO via GEI).
  • The Fed may be walking back the tough talk from last month. (Tim Duy).
  • Private payrolls grew by 205K according to the ADP report. James Picerno notes that while the level is solid, the pace is declining.
  • The Bad

    Most of the economic data tilted negative.

  • Earnings reports have disappointed. Even growth ex-energy is only 2.1% and sales growth barely positive. Earnings expert Brian Gilmartin provides data, analysis as well as a look at forward earnings. Bespoke notes that the overall stock reaction on earnings day has been slightly positive. Take a look at their lists of the biggest winners and losers.
  • ISM manufacturing was about as expected at 48.2, but it is the fourth consecutive month below 50.
  • ISM services remained in expansion at 53.5, but that was slightly lower than expectations.
  • Initial jobless claims edged higher, but Calculated Risk notes the level is still not bad.
  • Ford (F) F150 sales were down 5% on a year-over-year basis. It is still the best-selling U.S. vehicle, and is also popular with construction companies and small businesses, which is why I watch it as an economic indicator.
  • Employment gains disappointed, at least on the overall non-farm payroll gain. The story was actually mixed, since the unemployment rate and earnings were both higher. Everyone should remember that the “headline number” has an error band of over 100K, even after revisions. I like the WSJ summary of the report, featuring twelve charts.
  • The Ugly

    Martin Shkreli. His smirking non-testimony before a House committee was bad enough to make the Representatives seem attractive by comparison. My concern? A rational debate on drug pricing is needed. Between this guy and the candidates, we can expect months before this will happen. Meanwhile, what about the drugs that deserve investment — right now.

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