Economic releases in the past two weeks have been like night and day. The most recent week revealed the daylight of stronger data, while the previous week revealed the night of softer data. Yet, in aggregate, the equity markets were higher and the credit spreads were narrower — meaning that equity investors were more willing to take on the risks of stocks and bond investors did not need to be paid as much for taking on credit risk. On the other hand, energy and metals commodity prices fell over the past two weeks, and the U.S. dollar rebounded with the re-opening of the government.

Perspective:

The equity markets have had a good run this quarter. Are the new record highs in the markets justified by economic or earnings growth? The Price to Earnings ratio for the S&P 500 Nov. 1 was 18.7 times the past 12 months of earnings. Yet since stocks are priced on expectations we should also look at forward earnings. According to the Wall Street Journal web site Nov. 1, the P/E ratio for the S&P 500 was 15.9 times the forward earnings estimates provided by Birinyi Associates. FactSet also pointed out that analysts lowered their earnings estimates for the S&P 500 companies by 1.5% in aggregate during the month of October. Yet, the S&P rose 4.5% during the month. Stock prices appear to have gotten ahead of earnings.

On a personal note, my wife and I returned Nov. 1 from a 10-day tour of Turkey. In addition to learning about its people and its history, we had a first-hand view of the Turkish economy. From an economic perspective, we found the economy vibrant and its people entrepreneurial. We visited cities in the middle, coastal and western parts of the country, where we saw some evidence of Syrian refugees. In Istanbul we stayed in the old historic city, where traffic and economic activity was somewhat constrained by the narrow streets. On the day that we arrived in Istanbul, they were just opening an underwater tunnel through the Bosphorus to alleviate traffic congestion on its bridges, a sign that the government is taking steps to alleviate impediments to growth. From a purchasing power parity perspective, dinners (including local wines and beer) were about a third to half what they would have been in the U.S. Personal services were special; at the recommendation of a well-traveled friend I treated myself to a straight-edged razor shave and a haircut in Istanbul.

Economic Releases:

The contrast of the releases of the past two weeks was illustrated by the U.S. Employment Report released two weeks ago and the Industrial Production Report released just this past week.

The U.S. Employment Report for September was released late due to the government shutdown. The overall report was weaker than expected as were many of the reports in the earlier week of this Comment. Nonfarm Payrolls (blue in the chart) rose only 148,000; Private Payrolls (red in the chart) rose only 126,000; both were on the low end of the range of expectations. Net revisions of Nonfarm Payrolls for the prior two months totaled 9,000, partially offsetting the disappointment in the September report. Manufacturing jobs (green in the chart) increased 2,000. The Unemployment Rate dropped a tick to 7.2%, reflecting the declining pool of job-seekers. Average Hourly Earnings increased only +0.1%; the Average Workweek remained at 34.5 hours.

U.S. Industrial Production (blue in the chart) increased +0.6% in September; Capacity Utilization (red in the chart) jumped a half point to 78.3, a post-great-recession high. Both reports were on the high end of the range of expectations.

Other Economic Releases

Not all of the U.S. reports in the second week were stronger. The Conference Board's Consumer Confidence Index dropped more than eight points to 71.2 in October in response to the government shutdown. The Pending Home Sales Index fell six points to 101.6 in September. September Retail Sales fell -0.1%; ex-auto's Retail Sales rose +0.4%. Home prices, though, did pick up according the to the Case/Shiller Home Price Index of 20-Cities, which increased 1.3% in August, 12.8% YOY (not seasonally adjusted). On the stronger side, the ISM Manufacturing Purchasing Managers Index rose two ticks to 56.4 in October. The Markit PMI fell a point to 51.8; both remain in the expansion zone above 50. Jobless Claims dropped 10,000 to 340,000 in the week of Oct. 26. The FOMC met this past week and kept the monetary policy on course and reaffirmed that the level of asset purchases would be data-dependent.

In the EU, the Unemployment Rate increased two ticks to 12.2% in September. Yet, Economic, Industrial and Consumer Sentiment improved in October. Germany's Unemployment Rate remained at 6.9% in October; Retail Sales fell -0.4% in September; Germany's Ifo Survey for Economic Sentiment, Current Conditions and Business Expectations all fell a bit in October. The UK's CIPS PMI slipped to 56.0, but remained well in the expansion zone in October; UK's third quarter GDP increased +0.8%.

The Bank of Japan also met this past week and, as expected, kept its interest rates and asset purchases unchanged. Japan's Unemployment Rate dropped a tick to 4.0% in September. Japan's PMI for Manufacturing rose two points to 54.2 in October; its Industrial Production rose 1.5% in September. China's CFLP PMI for Manufacturing rose three ticks to 51.4; the Markit PMI for Manufacturing rose seven ticks to 50.9.

Equities Markets:

Most European and American equity markets were higher in the last two weeks. Except for the Nikkei, all of the indices have had a positive start to the fourth quarter. Falling credit spreads and lower interest rates have given the ML Credit indices a positive start to the quarter as well.

Bond Markets:

Bond yields were lower outside the U.S. over the past two weeks. U.S. rates rose over the past two weeks on some firming of economic data following the re-opening of the government.

Currencies & Commodities:

The U.S. dollar rebounded with the opening of the government and the higher U.S. interest rates over the past couple of weeks. Energy commodity prices fell and metals prices were a touch lower over the past two weeks.

Who is John Davidson?

John W. Davidson, CFA, started writing these Comments more than a decade ago as a personal discipline when he was promoted to from portfolio manager to chief investment officer and CEO.

Most recently, he was the president of PartnerRe Asset Management Corporation, responsible for the management of PartnerRe's invested assets, which grew from $4 billion to $12 billion during his tenure. After joining PartnerRe in the fall of 2001, he hired the staff, built the trading floor and created the infrastructure to manage both fixed income and equity assets internally. He retired from PartnerRe at the end of 2008 and moved to Maine, where he focused on board work.

He has more than 35 years of industry experience, including positions with investment management responsibility for separate institutional accounts, mutual funds, trusts and insurance assets. Prior to joining PartnerRe, he served as president and chief executive officer of two other investment management companies. For various companies he has held positions as chief investment officer, chief economist, head of fixed income and portfolio manager. As a portfolio manager, Davidson managed and traded U.S. Government Securities as well as futures and options on fixed income instruments.

His real world experience is backed by a strong academic foundation, which includes earning a Master of Business Administration in finance and a Master of Arts in mathematics from Boston College, as well as a Bachelor of Arts, cum laude, in economics from Amherst College. He holds the professional designation of chartered financial analyst.

His experiences and credentials have brought him to the public as a television commentator and conference speaker. In addition to his frequent past appearances on CNBC, CNNfn, Bloomberg TV and Yahoo FinanceVision, he appeared as a special guest on Wall $treet Week with Louis Rukeyser. Reuters, Bloomberg and other business press services have quoted his views on the market. He has taught CFA preparation programs, as well as other courses offered by the Stamford and Boston CFA Societies, and the National Graduate Trust Officers' School.

Davidson is a natural leader in both his professional and personal life, having developed those skills early in his career as a naval officer. He spent three years on active duty, which included a year on the rivers of Vietnam, and 24 years in the Naval Reserve, from which he retired as a captain in 1994.

Davidson is treasurer and board member of the Camden Conference. He is also on the investment committee of the Pen Bay Health Foundation. He serves as an independent trustee for mutual funds.

In his leisure time, he is an active sailor, tennis player and skier. With his wife, Barbara, he renovated a 100+-year-old home in Camden, where they enjoy spending time with their two golden retrievers and having visits from their five children. He can be reached at jwdbond@me.com.