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Marcuard's Market update by GaveKal Research
Tolstoy said that “spring is the time of plans and projects.” Obviously, Tolstoy did not manage money, as for the fourth year in a row, spring appears to be the time when US growth indicators roll over, the euro project threatens suicide, and investor risk appetite falls out of fashion. To be honest, we are still scratching our heads for a solid explanation (and very much welcome comments from our wise readers). But here are a few possibilities to kick off the discussion:
Are seasonal adjustments for US growth data misleading? This is a question a number of strategists, including our friend Peter Kim at Daewoo Securities, have recently been considering. It is no doubt speculative, however given the rapid change of the US economy in the last four years, it is conceivable that even the very best statisticians would struggle to apply appropriate seasonally adjustments. Take US payrolls as an example. Unadjusted, they collapse every winter, and then rebound in the spring. This is for a number of reasons, including the fact that construction work slows during the coldest months and then rebounds as the ground thaws in spring. Statisticians adjust for this, and periodically adjust the scale of these adjustments as the nature of the economy changes. But adjusting the adjustments is not an easy task, considering construction payrolls collapsed 30% from 2007 to 2011 and then started to recover (construction payrolls are now “only” 25% below 2007 levels). During a period of major economic change such as in the aftermath of the greatest recession in a generation, it is possible that seasonal adjustments are “off.” Consider that unadjusted, private payroll growth actually accelerated in March (as it usually does) to +684,000 jobs, from +544,000 in February and –2.3mn in January. It is only after the major seasonal adjustments that we get the headline deceleration to 95,000, from 254,000, which understandably has everyone worried.
Is there a seasonal reason for the euro crisis to flare up in spring? Perhaps it has something to do with the political calendar? Perhaps companies try to squeeze production out in the spring before much of the European labor force starts working fewer hours in the summer, leading to an increase in the demand for capital—a demand for cash that lays bare any existing weakness in the monetary union? Or perhaps it is simply due to the weather? Europe’s revolts and revolutions have tended to occur in the spring or early summer for the simple reason that throwing stones at the police in the street is a lot less fun when it is freezing outside.
Perhaps it is just coincidence. It could just be that every spring has happened to bring some shock—whether it be a breakdown in European policymaking, a debt ceiling debacle in the US, a Japanese earthquake, an Arab Spring, a massive yen devaluation. But whatever the reason, investors might be forgiven for feeling that the flight of the sparrows does not bring glad tidings.
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