Whose Year-Ahead Vision is 20/20?
The economic calendar is especially important. Several housing reports, JOLTs, and the final estimate for Q3 GDP lead the list. Despite this, I suspect a powerful draw from the Gregorian calendar. It is time for those annual forecasts! You will see many of them, so the right question is:
Whose vision of the year ahead is 20/20?
I’ll consider a typical range of ideas and offer some comment on each.
Last Week Recap
In my last installment of WTWA, I provided a gift for readers – the gift of time. Many seemed to appreciate the list of things to ignore. Knowing where to focus your attention is one of the biggest challenges for investors. I considered some factors behind the continuing market rally. For comparison, readers might appreciate The Unending Artificial Boom, a response to the devotees of Austrian economics.
The Story in One Chart
I always start my personal review of the week by looking at a great chart. This week I am featuring the version from Jill Mislinski who combines a lot of important data into a single, readable chart.
The market gained 0.7% for the week. The trading range was only 1.4%. You can monitor volatility, implied volatility, and historical comparisons in my weekly Indicator Snapshot in the Quant Corner below.
…to Mark Thoma on his retirement. His pioneering work in economic blogging paved the way for many others. In particular it demonstrated the value to universities who made promotion and tenure decisions. This was an important and courageous accomplishment. The economic debate is much, much more vibrant as a result of his effort. We all hope that he continues to read and to write.
I got a laugh from this chart and the twitter feed discussing it. I wanted to use it but could not figure out how to fit it into this week’s theme. Mrs. OldProf suggested that I use it anyway and see if anyone noticed. I assured her that my astute readership would definitely notice that it is out of place.
The Visual Capitalist often highlights data that would otherwise go unnoticed. Most abhor violence and seek its reduction in all forms as a matter of principle. There is also an economic cost. Can you guess the total cost in a single year? (before checking out the helpful chart!)
Each week I break down events into good and bad. For our purposes, “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!
New Deal Democrat’s high frequency indicators are an important part of our regular research. The results remain positive in both the long- and concurrent-time frames, but neutral on the short-term forecast. NDD continues to highlight the metrics to watch if concerned about manufacturing weakness spreading to the consumer.
- NFIB small business optimism registered 104.7 in November, up from the prior 102.4. David Templeton (HORAN) emphasizes the favorable view on economic growth.
- Mortgage applications increased 3.8% versus the prior week loss of 9.2%.
- Agreement on NAFTA 2.0. At last. The motives of the parties were quite different, but still led to a compromise agreement that will help all of the North American economies. (LA Times).
- Inflation remained tame. Core CPI increased 0.2%, in line with expectations as well as October’s reading. Core PPI declined 0.2% versus expectations of a 0.2% increase and October’s 0.3%. The inflation data has had little market impact in recent years. The modest increases are market-friendly since there is no pressure for Fed action. Here is a helpful chart showing the importance and contribution of various components.
- The British election. As always, I am scoring this as “good” using the definition of “market-friendly.” It is neither an indication of Tory support nor an opinion in opposition. The general market reaction was that uncertainty will now be reduced. The size of the victory means that Boris Johnson will not need to count on extreme party members to build a coalition. It is too soon to assess the economic implications of Brexit since we now face another year of negotiation. Good coverage, as expected, in the Economist.
Initial jobless claims spiked higher, to 252K. This was a big increase over last week’s 203K and a big miss of expectations – 212K. Some are citing the late Thanksgiving holiday and the effects on seasonal adjustments. We’ll know more next week.
Retail sales increased only 0.2% in November, a big disappointment compared to expectations of a 0.5% gain. October was revised higher, to a gain of 0.3%, so that is part of the explanation. The ex-auto numbers were even worse, an increase of only 0.1%. Despite this, there is some positive action in purchases of large durable goods.
Consumer interest rates are not (yet?) falling in line with Fed policy. Doesn’t it seem like they always go up immediately on a Fed hike? Thought so.
How about reducing the number of food and safety inspectors in pork plants by 40%? Instead, rely on company employees not trained for this job. And let’s also speed up the lines. (The Hill).
Every industry wants less regulation and more profit, but how many consumers want to return to the Upton Sinclair days? It is also vaguely ringing a bell about a company in the news that was overly reliant on unsupervised employee inspections. I think they earned the worst of 2019 award.
The Week Ahead
We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react.
The economic calendar is a big one, featuring important housing data, the JOLTs report, leading economic indicators, personal income and spending, the third estimate of Q3 GDP, PCE prices, and Michigan sentiment.
There will also be plenty of reaction to the trade agreement as more details are revealed. And of course, the impeachment story continues.
Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.
Next Week’s Theme
Once again there are many important economic reports but probably no fresh conclusions. The calendar will be driving financial media through the end of the year. It is the time for the de rigueur forecasts for the year ahead. The key question?
Whose vision of the year ahead is 20/20?
(Sorry. I could not resist).
Calendar-driven market assessments are popular but often not meaningful. Why start with January for a market overview? Why not with Spring? Or October? And why twelve months? This year the timing is more relevant. The recent progress on trade deals has shuffled the deck. It is time to take a fresh look at your expectations. I am going to show a range of ideas and a few comments on each, a format that readers have encouraged me to use when possible.
Crucial to your outlook is your explanation for the lack of post-deal enthusiasm in Friday’s trading. Sergei Klebnikov of Forbes pulls together many good sources – an excellent framework for our exercise. The first four are from his column.
Chris Zaccarelli, Chief Investment Officer
Expectations for the deal were already priced in. “Stocks already ran up 7% in just the past two months alone on the belief that a deal would be signed.”
A good source on explaining trader reactions.
I disagree. This is a common post-hoc explanation for market reaction. Since no one really knows what is priced in, the conclusions are difficult to challenge. I saw little confidence in an early deal. More observers emphasized the conflicting tweets and sameness of the commentary.
Mark Hamrick, Bankrate senior economic analyst
The announcement lacks details.
A journalist with extensive experience on economic topics
He is quite correct about the lack of detail. Many agree with this viewpoint. I expected criticism of any announcement and was not disappointed.
Joseph Brusuelas, RSM chief economist
Deal was pushed to beat the December 15th deadline. It has no immediate tariff relief, pushing things to phase two.
Good economist with emphasis on accounting
Negotiations always push deadlines. It is how one shows supporters that you have gone all out. Equally true in business. Starting with easiest issues is a good approach.
Nicholas Sargen, SVP and chief economist at Fort Washington
Suspicious of more rollbacks. Trump needs dry powder for future negotiations.
Good economist with fact-based approach
I respect Sargen’s work, but doubt that he has any real insight into the mind of the President or his negotiating strategy.
Beware of counter moves following the Thursday surge. “Smart money” is lightly selling.
Engineer, nuclear physicist, author and entrepreneur.
There is a tendency for experts in scientific fields to believe the same approaches work well on social science problems. As a leader of inter-disciplinary teams, that is not my experience. But the technical metrics are interesting.
Jeff Gundlach, DoubleLine CEO
Very bearish on US stocks, especially during next recession. Likes overseas markets. Expects a weaker dollar. (Barron’s)
Great record as a bond manager. Math and philosophy background. Succeeded on raw intelligence.
I can’t remember when Gundlach made an accurate forecast about stocks. That does not stop people from asking him. He provides a good interview – outspoken and colorful. This is a classic case of some investors inferring expertise in one field from success in another.
Chris Rupkey, chief financial economist at MUFG
“Back up the truck and buy, buy, buy.” (MarketWatch) The UK election outcome and progress on the trade deal has improved the economic outlook.
A good economist with long market experience.
Rupkey is accurate in noting a great opportunity and reduced risk.
Peter Schiff, CEO of Euro Pacific Capital
The deal will fall far short of the comprehensive deal Trump promised when the trade war first launched. It’s highly unlikely that phase two will follow any time soon, if ever. (@PeterSchiff)
Undergrad degree in finance and accounting. Austrian economics and gold.
Successful broker and media celebrity, his message resonates with a wide audience. He accurately predicted the issues around the Great Recession. Many inaccurate forecasts have followed.
Dan Clifton, Strategas Research Partners
“Investors should not overthink what is being agreed.” (Research note quoted in Barron’s). Big gains will come from reduced business uncertainty.
Policy researcher with great skill and long experience
One of my favorite sources, he takes a pragmatic approach to policy issues. He is the closest we have to blending the various ideas into a single narrative.
Even good sources swing out of their Happy Zone. A complex topic often requires a combination of skills. Since none of us have all of the tools, we must figure out what to infer from each source.
The trade issue is a classic example of this situation. For those willing to provide respect where it is due, putting aside their own opinions, it provides a great opportunity. This especially means political opinions. Half of the country will criticize the agreement out of a desire to deny the President a victory. As always, I am evaluating it one criterion: Is it market-friendly?
I’ll have some additional observations in today’s Final Thought.
Quant Corner and Risk Analysis
I have a rule for my investment clients. Think first about your risk. Only then should you consider possible rewards. I monitor many quantitative reports and highlight the best methods in this weekly update, featuring the Indicator Snapshot.
Both long-term and short-term technical indicators remain neutral, but are weakening. I use this information to assist in entries and exits planned for other reasons.
Recession risk remains in the “watchful” area. There is little confirmation for the risk signals, which we have been monitoring since May. Many observers who reacted to the yield-curve inversion have become less worried.
Some readers have asked how my conclusion can be bullish when technical indicators are weak. The outlook is intended for investors. For them, the technical indicators are mostly useful to guide specific entry and exit pionts. An attractive equity risk premium and modest recession odds are the keys for investors.
The Featured Sources:
Bob Dieli: Business cycle analysis via the “C Score”.
Brian Gilmartin: All things earnings, for the overall market as well as many individual companies.
Doug Short and Jill Mislinski: Regular updating of an array of indicators. Great charts and analysis.
Ben Casselman (NYT) reviews his recession indicators, describing the significant improvement from last summer. He asks whether the climate has improved or fears were overstated.
BCA research does not see a recession until midway through 2021. (MarketWatch).
BCA’s Peta thinks that even if the next recession starts exactly halfway through 2021, returns next year will still be robust.
“Over the last 50 years, the S&P 500 has peaked an average of six months before the start of a recession, and returns heading into the peak have been quite strong,” he wrote.
Insight for Traders
Our weekly “Stock Exchange” series is written for traders. I try to separate this from the regular investor advice in WTWA. There is often something interesting for investors, but keep in mind that the trades described are certainly not suitable for everyone. We welcome my colleague Todd Hurlbut, Chief Investment Officer at Incline Investment Advisors, LLC. Todd needs to get tougher with these lazy models. They produced output but figured that with me on vacation they did not need to explain anything. They will be back in action next week. Or else!
Insight for Investors
Investors should understand and embrace volatility. They should join my delight in a well-documented list of worries. As the worries are addressed or even resolved, the investor who looks beyond the obvious can collect handsomely
Best of the Week
If I had to recommend a single, must-read article for this week, it would be The Market Is No Benchmark. Here’s Why. Sarah Newcomb explains that we manage what we measure, so it is important to find an appropriate measure of success or failure. She notes the difficulty in finding such a strategy, the impact of diversification, and the non-representativeness of broad indexes. Here is her argument on diversification:
Second, if you have diversified your portfolio, you will not always beat the market, because diversification intentionally lowers your risk exposure, meaning that when the market is way up, you will be somewhat up, but when it is way down you will only be somewhat down. You can’t consistently beat the market in both greater gains and smaller losses (see my first point)–and if you can, and you can prove it, please get in touch, because I’d like to see those numbers. The point here is that long-term investment strategies aim at slower, steadier growth over time, so looking at short-term performance (yes, one year is short-term) doesn’t make sense anyway.
A better benchmark is personal. The key question is “Am I on track to reach my goals on time?”
She distinguishes between an accumulation phase and a withdrawal phase, something that should have a familiar sound to WTWA readers.
Chuck Carnevale continues his series on valuation by turning to fast-growing stocks. He explains the importance of earnings growth and the PEG ratio, drawing upon Peter Lynch. As usual, he illustrates the points with some great examples.
Kirk Spano suggests Pioneer Resources (PXD) as a good way to invest in an oil stock rebound. He examines a wide range of metrics and provides background on the effect of new pipelines for Permian Basin producers.
“Davidson” (via Todd Sullivan) also sees upside potential in oil prices, noting the cap-ex limit on drillers.
Barron’s cover story provides a list of 10 stock picks for 2020 – and a review of how they did last year.
Hoya Capital Real Estate is bullish on continued strength in the homebuilders. They provide a comprehensive look at macro factors as well as a ranking of individual companies.
Broadcom (AVGO). Wallace Witkowski (MarketWatch) notes the stock decline, the increased price targets and suggests some analyst conclusion. [Jeff – I love it when analysts think they know better than proven managers. See if you can find the last time that analysts universally questioned an acquisition by management. Hint: Look for the gap.]
Looking for value stocks? Bill Nygren includes Google and Netflix in his concentrated value portfolio. (Barron’s). Key quote from the interview:
I remember riding home in a cab from work, and the driver recognized me from CNBC. He told me that his portfolio was kicking my ass. It’s the curse of being a value investor: When the opportunity is greatest, it’s almost always when your recent performance has been poor.
The Great Rotation
JP Morgan Chase’s 2020 outlook features the Great Rotation. Top global analyst Nikolaos Panigirtzoglou led a team that examined the mid-cycle rate adjustment thesis. (MarketWatch)
But JP Morgan also see the stars aligning for a powerful “Great Rotation II” into stocks from bonds in 2020, after investors pulled some $203 billion out of global equity funds this year and plunged some $789 billion into bond funds.
Their forecast already baked in a de-escalation of the protracted trade dispute between Washington and Beijing, in no small part due to the looming 2020 presidential race.
David Kotok sees Q419 as a possible turning point for emerging markets. He cites three important factors – all part of the Great Rotation.
Market-savvy Paul Schatz is watching the potential breakout in the Russell 2000.
Watch out for…
Investments you don’t really understand. Stefan Cheplick describes a blatant Bitcoin Ponzi scheme, passes along some wisdom from Peter Lynch, and adds his own perspective.
Two overpriced REITs. Jussi Askola warns about overpaying for otherwise attractive REITs.
The Low Volatility Factor. As part of their exhaustive weekly report MarketDesk analyzes a variety of factors. This week they show a negative correlation between the valuations of the low volatility factor and the S&P 500 (the valuation gap) and future market returns.
They also suggest some alternative factors that emphasize risk control.
Do you consider the credentials, skill, and record of sources in the news? If not, you are especially vulnerable to the most dramatic positions and headlines. Be especially watchful of stories that say “Investors were cautious (or enthusiastic) about…..” Most real investors are not paying attention until the nightly or weekly news. The daily and intra-day stories are all about trader reaction.
It is a challenge. A great source on one subject may provide little help on something else. Don’t expect the source to make any distinctions. When playing the role of expert few modestly say, “That is not really in my field.”
When you put together the expert advice you see skeptical traders, economists who want more information, economists playing “political expert,” global investment advisors who are trying to game the trade negotiations. There are few political experts involved, but those who are do not appreciate the economics.
The current trade deal touches all of the bases I identified nearly two years ago. It is what we have been waiting for – a beginning on the simplest matters, a public commitment, pressure from within the GOP, the need for economic progress.
Even the criticism is in line with a strong policy result, just as we expected.
For those of us willing to draw upon the right sources for each question we see the following:
- A change in the global environment on Brexit and an important first step on US trade wars.
- Economic effects of about 0.3% of GDP during the next year from the Phase one agreement. Further gains of as much as 0.7%.
- Reversal of many soft-appearing economic series, and a significant extension of the “aging” bull market.
- Low and falling odds of a near-term recession.
- A skeptical trading community.
- Market highs in spite of gloom, not reflecting bubble-style euphoria. (Barrons’)
I see the trade theme as one of four pillars in my Great Rotation portfolio. There is not a rush to get in (I am about 25% invested in it), but you should be in the accumulation phase.
Great Rotation Hint of the Week
Take a look at stocks that did well on Thursday, when the prospects for the deal became clear. Those are candidates for further gains – major ones – over the next year.
Do you have the right skills?
Few investors will cash in on this opportunity. It is a test of all the needed skills.
Discipline, political agnosticism, ignoring irrelevant news, recognizing when an event is truly different, patience, and willingness to abandon popular biases.
The positive effects will appear gradually, just as the negative tariff effects were not quickly recognized by many.
Some other items on my radar
I’m more worried about:
- North Korea – on a mission to prove new capabilities before the end of the year.
- Middle East – Israel involvement in Syria, Iran involvement in Iraq.
I’m less worried about
- Impeachment news. The story is not getting much traction with the electorate and even less with the market. This is what I predicted months ago.
- Economic and market downside. There is less actual risk than in many months.