07/30/14   There Will Be Revisions

Editor’s Corner

Ron Rowland

Getting a grip on the status of the U.S. economy is a matter of perspective.  Depending on whether you compare the most recent data to the previous reporting period, to a year ago, to pre-recession levels, or against historical averages will alter that perspective.  The inevitable data revisions are another source of distortion.

This morning, the Commerce Department released its second quarter GDP advance report indicating the economy grew at a 4.0% annual clip.  This is significant because last month we learned first quarter GDP growth was negative 2.9%.  However, that is just one data point in a series of revisions.  Three months ago, the advance estimate for first quarter GDP was reported as +0.1%.  A month later, the first revision lowered it from a positive number to negative 1.0%, prior to whacking another 1.9% off in the subsequent revision.  The best thing we could say about the “final” number was there would be no further revisions.  Proving us wrong, the Commerce Department revised the first quarter number again today, and this time it went the other direction with an improvement to just a 2.1% shrinkage.  Never say never – especially when it comes to government data revisions.

The Fed concluded its July FOMC meeting today, and its post-meeting policy statement kept revisions to a minimum.  That met with our expectations, but we were surprised to learn that many economists were of the belief the recently stronger employment picture and rising inflation prospects would make this the most important policy statement in quite a while.  As it previously announced, the Fed intends to continue tapering its bond buying and keep interest rates low for an extended period.

Last Thursday, the new home sales report revealed that sales plunged 8.1% in June.  A month ago, we were told the May number was extraordinarily robust, up +18.6% for the largest increase in 22 years, putting annualized sales figures at their highest level in six years.  Speaking of data revisions, these figures did not hold either.  May’s revised growth rate is now just +4.0%.  This is a far cry from +18.6%, and it is only the largest increase in a few months instead of 22 years.  Additionally, the annualized sales rate fails to be the highest level of the past six months, falling far short of the original “highest in six years” claim.  The only record that was set was the record for the largest revision in the history of the data series.

The widely anticipated July employment reports are scheduled for release this Friday.
Before you get too excited or disappointed about the figures, remember they are subject to revision.

Investor Heat Map: 7/30/14


Two sectors improved their relative rankings while five suffered degradations.  Telecom posted the best improvement, jumping from fifth to second and increasing its momentum amidst a generally weak market.  An IRS ruling allowing Windstream (WIN) to spin off its fiber and cable network into a REIT (and save on taxes) was behind yesterday’s industry-wide surge.  Utilities was the other sector to improve its standing and did so by climbing two steps up the ladder and moving out of last place.  Technology extended its time at the top to three weeks.  Real Estate, Energy, and Health Care all moved down a notch as a result of Telecom’s rise.  Health Care managed to increase its momentum and now makes the upper tier a crowded place while strength begins to decline rapidly among the lower tier constituents.  Materials, Financials, and Consumer Discretionary all held their relative positions, although their absolute strength weakened.  Consumer Staples and Industrials each dropped a notch due to the rise of Utilities.  Consumer Staples is in danger of flipping over to a negative trend, and Industrials is the first sector to do so – landing it in last place.


The style categories are all weaker today and four are now in the red.  The top seven kept their same relative order, which happens to be a defensive pattern favoring large cap blue chip stocks.  The Mid Cap/Small Cap demarcation is quite visible, with both a large drop in momentum and a color change occurring at that point.  Some ranking changes took place in the lower tier over the past week.  Most notable was Small Cap Value falling two places to tenth and joining the negative momentum group.  When compared to the sector and global charts, the style rankings make it obvious that market weakness is currently concentrated in smaller company stocks.


China surged this week on good economic news.  In our last update, Latin America had a comfortable margin over second place China, but they dramatically reversed those roles today.  With its two major constituents sitting in first and second, the more broadly defined Emerging Markets category moved up to third.  Canada remains the strongest developed market category, although it was pushed down a notch by the strength in developing markets.  Japan and Pacific ex-Japan swapped places but remain closely aligned.  The U.S. heads up the lower five categories, and they maintained relative rankings identical to a week ago.  World Equity, the U.K., and EAFE show little change after a mostly uneventful week.  Europe is the only global category in the red, an “honor” it has held for three weeks.


The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.


“There’s a reasonable chance the 4% 2Q GDP number will change.”

Nick Timiraos, The Wall Street Journal


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