While top-down macro headlines, anchoring-biased surveys, and election-oriented government-aided statistics suggest a world of unicorns and teddy bears where everyone and their pet rabbit 'Dave' should be buying stocks with both hand and feet for the 'upside' when the fiscal cliff is 'solved' and 'Bernanke has got your back'; why-oh-why is every rally faded? In Size? Perhaps this is the answer? Goldman Sachs Analysts Index (GSAI) - a quantified bottom-up look at firm-by-firm views of the current and expected economic reality aggregated across all of the company's analysts - is bad and getting worse in a hurry. The main index slumped to 32.9 in October from 44.1 in September, with all sub-components falling 'suggesting depressed business activity from the bottom-up'. Perhaps worse, the employment index remains weak and price indices suggest a deflationary future. This index of real economic activity is its lowest since the 2008-9 recession and sends a considerably more pessimistic message than many of the business 'surveys' from the Philly Fed or Chicago PMI. Perhaps it is this reality on the ground that is stalling the wealth-building stock-levitation that is so economically required by our central planners - as it seems the broad improvement in September was transient.
It's all going so well? The Sisyphean Market...
Goldman Sachs Analysts Index suggests the economy is deteriorating rapidly...
Via Goldman Sachs:
The GSAI tumbled 11.2 points to 32.9 in October from 44.1 in September. This is the lowest level since the end of the 2008-09 recession, and the underlying components fell broadly as well. The sharp deterioration in the headline and underlying components seems consistent with the predominantly negative sentiment from disappointing Q3 earnings (especially on the revenue side) thus far. Compared to other business surveys such as the Philadelphia Fed and the Chicago PMI, the GSAI sends a more pessimistic bottom-up message and suggests downside risks to ISM (Exhibit 1 above). (As a reminder, we construct the headline GSAI using the following weights: 30% for new orders, 25% for sales/shipments, 20% for employment, 15% for materials prices, and 10% for inventories. These weights parallel the Institute for Supply Management’s pre-2008 practice, substituting our materials prices index for their supplier deliveries index. The GSAI includes service as well as manufacturing industries. As with the ISM indexes, a reading above 50 theoretically signals growth while an index level below 50 signals contraction. However, our analysis suggests that a GSAI of 50 appears more consistent with trend growth than with no growth.)
In addition to the headline index, most of the underlying components of the GSAI also fell sharply. The sales index gave back its gain in September, falling 12 points to 36.4 in October from 48.4, registering the fifth consecutive month below the 50 mark. Similarly, the new orders index fell 15.4 points to 26.3 from 41.7, contributing 4.6 points alone to the headline drop. The inventories index saw the lone gain, rising 1.6 points to 43.3. Consequently, the orders-inventories gap fell back into negative territory at -17.0 versus flat in September. The sharp reversal in the sales, new orders, and orders-inventories gap measures suggest that the broad improvement in September was likely transient, and that activity and demand will likely remain depressed despite tight inventories.
The employment index fell for the second consecutive month to 39.3 from 45.3 in September. This is the lowest index level since February 2010, and—similar to weakness in the employment component in the Empire State and Philadelphia Fed surveys—continues to point to a slow recovery in the labor market. While the September employment report showed encouraging improvements particularly from the household side, the pace of improvement is unlikely to sustain.
On the inflation front, all three price indexes dropped sharply. The materials prices index fell 16.7 points to 25 from 41.7 in September. The output prices index fell 7 points to 38.2 from 45.2. The index for wages and labor cost fell 5 points to 60.0 from 65.0. While the wages index continues to look high relative to the materials and output prices indexes, it has reverted from a high of 66.7 in August. This week's Q3 employment cost index further suggested no inflationary pressure from the wage side. Overall, the trends in the three price indexes continue to support our view on slowing core inflation through 2013.
Qualitative comments in October reflect more pessimism than those from September. In particular, companies across sectors noted weaker than expected earnings and/or lowered guidance amidst the disappointing Q3 earnings season. The European crisis and the upcoming US "fiscal cliff" resurfaced as the two key risks weighing on business outlook and the broad economy. For instance, some industries such as Communication Services and Defense cited pressure specifically from heightened fiscal uncertainty and government spending cuts.
