A Perfect Storm?
Hurricane Sandy left investors with idle stock screens this Monday and Tuesday as the New York Stock Exchange closed for two consecutive days—the first time that weather has done so since 1888. The loss of life and property is sobering. Our collective thoughts and prayers go out to those affected by this killer storm, which left traders and media commentators to speculate about its economic and company specific impacts. Home improvement retailers Lowe’s and Home Depot, United Rentals and pump maker Pentair were among the winners when trading resumed Wednesday. Stocks succumbed to a late Friday sell-off that left the major indexes largely unchanged for the week, with benchmark Treasuries rallying modestly.
Our best guess is that Sandy will negatively impact fourth quarter GDP, but that a massive rebuilding effort in the nation’s most densely populated corridor will result in somewhat faster economic growth early next year. Insurable losses, excluding flood damage backstopped by the federal government, are estimated to be as high as $20 billion. Catastrophic claims will ding the near-term earnings of insurers like Allstate and Chubb, as well as their reinsurance partners, but the more important question for investors is whether Sandy will precipitate the kind of rate hikes that have historically enabled property and casualty insurers to exchange near-term pain for long-term gain. Ironically, both Allstate and Chubb recently reported better-than-expected earnings, with both citing benign claims activity.
Despite the hurricane, the U.S. government hewed to its plan of releasing the October payroll report as originally planned. The numbers out Friday were better than expected, with net job creation totaling 171,000 and the previous two months’ job tally being upwardly revised by a cumulative 84,000 jobs. Service sectors such as retail and healthcare were notable contributors, and manufacturing jobs rebounded. The headline jobs number was encouraging, but an uptick in unemployment to a 7.9 percent rate coupled with an underemployment rate that remains near 15 percent are stark reminders of how just how slow the labor market recovery has been. Third quarter productivity gains of 1.9 percent confirm the job market weakness, portraying a private sector that favors squeezing more output from its existing employees to hiring anew. Because unemployment remains high, workers have little leverage to demand higher wages and, as a result, unit labor costs are falling. So while revenue gains are hard to come by at this point of the economic cycle, productivity is helping buoy corporate America’s bottom line.
The Late Innings of Earnings Season
Meanwhile, earnings season rolled on. Notable misses came from oil giants ExxonMobil and Chevron, both companies displaying continued declines in petroleum production exacerbated by cyclically low natural gas prices domestically. On the flip side, automakers GM and Ford reported surprisingly good numbers in light of the losses they continue to incur in Europe. Capacity there is being curtailed, but cutting jobs in Europe is a process, not an event.
Our Takeaways from the Week
- Hurricane Sandy is exacting a substantial human and economic toll, but a resilient U.S. economy will likely recover lost output longer term
- A surprisingly poor earnings season is beginning to wind down