This is a data-heavy week in the markets. With the price-action of most major indexes bouncing around showing no clear trend, let's explore the data that investors are chewing on when making their assessment of what's to come.
Interpreting the true nature of economic data can be difficult since so much data exists and is presented in so many different ways. Here's a good example: One headline today reads, "Consumer Spending Posts Biggest Drop Since 2009."
Anyone who reads that, even if they take the time to finish the article, walks away with an "uh-oh" feeling in their stomach and probably a bearish outlook. Since most news these days is designed to elicit emotion, this really isn't all that surprising, but it does seem a little unfair. Typically, authors and publications who report on data like this do not take the time to put it in context.
For example, if you account for inflation, consumer spending for December only fell by 0.1%. Two thirds of the drop was not a result of consumers buying less, but rather from lower prices. Already the tension created by the headline begins to fade.
Then consider that the latest GDP report showed that consumer spending in the fourth quarter rose by 4.3%, the fastest growth rate since 2006. And this comes on top of a 3.2% increase in the third quarter. Starting to have a different takeaway, right?
Finally, if we take an even longer-term perspective, we find that consumer spending was up 3.9% for all of 2014, an acceleration from the 3.6% growth in consumer spending seen during 2013. It's probably unnecessary, but I could also throw in that most readings on consumer sentiment are at or near 10-year highs, indicating an abundance of upbeat consumers. At this point you're probably feeling a lot more bullish on the U.S. consumer than after reading that initial headline.
The misinterpretation of data, facilitated by the media, can wreak havoc on decision making. With so much data being thrown at us on a daily basis, our ability to remain grounded and take a longer-term approach to analyzing the data can be a huge advantage. When you also consider that the goal of DTL is to remain on the correct side of the Primary Trend, this becomes even more true.
Moving on, the savings rate for December rose to 4.9%, which equates to U.S. consumers setting aside about $75 billion. This boost in savings signals a stronger and healthier consumer who has an increased capacity to buy in the future.
Personal income is also rising and was up 0.3% last month. This reflects the continuing strength in job growth as the U.S. added more jobs in 2014 than in any of the last 15 years. On Friday we will receive the latest monthly nonfarm payrolls report, which will provide a clearer view on labor market conditions. So far there has been no material uptick in jobless claims, indicating that the trend of net job gains should continue.
Regarding consumer prices, the Fed's preferred inflation gauge, the PCE, declined by 0.2%, further validating the disinflationary trend. The core rate was unchanged, signaling that most of the weakness is still coming from energy. As long as the core rate holds steady, the Fed could theoretically begin raising rates under the guise that they expect inflation to trend back towards the 2% target. Any material declines in the core rate, however, and it's a good bet that rate increases will be off the table.
[Listen to: Matthew Kerkhoff: Why QE Can’t Lead to Hyperinflation Part 1 and Part 2]
Two different readings on the state of manufacturing also reflected deteriorating conditions. Both the Institute for Supply Management's manufacturing index and the Markit PMI came in at the lowest readings in a year. The caveat here is that both readings still signal growth, just slower growth.
The following was an excerpt of Richard Russell's Dow Theory Letters. To receive their daily updates and research, click here to subscribe.
