The spread between 30-year US treasuries and 10-year US treasuries has fallen to just 60 bps which is the smallest spread in about 2 years.
While the myth that stock market returns are highly correlated to a country’s GDP growth rate has largely been debunked, there remains a strong, and intuitive, relationship between corporate profits and GDP.
CPI excluding food and energy (core-CPI) increased by 31 bps in January for the largest one month increase since March 2006. Headline CPI increased to 2.54% year-over-year which is the fastest growth rate since March 2012.
Equity returns and earnings estimates should presumably be related. It makes intuitive sense that if earnings estimates are increasing for a sector than equity prices for that sector should trend upwards as well. And this broadly holds up except oddly with the health care sector.
Just 44% of developed market stocks have outperformed the MSCI World Index over the past 200 days compared to 57% outperforming on average over the past 15 years.
The Boom-Bust Barometer (made famous by Dr. Ed Yardeni) is a simple, but effective, way of avoiding large drawdowns in the stock market. This indicator is calculated by taking the CRB Raw Industrial Price Index divided by initial unemployment claims.
Out of 24 developed market industry group, six currently look overbought in the short-term. Two come from the financial sector, two come from the technology sector, one from consumer staples sector (surprisingly) and one from the materials sector.
After underperforming in 2016, growth stocks have once again started to outperform value stocks in 2017. As the chart below illustrates, the S&P 500 Value Index consistently outperformed the S&P 500 Growth Index from 2002-2006.
The stronger dollar is flowing through into our purchasing power parity (PPP) CPI differential models. Overall against 18 currencies, the USD is overvalued against 12 of them on a PPP basis.
Over the past 10-years personal income in the US has increased at a 3.39% annualized rate which is the slowest 10-year annualized growth rate since the data began in 1960.
The Conference Board’s Coincident-Lagging Ratio has done a pretty good job of identifying recessions since 1958. That is, until now. In each of the last eight recessions, the Coincident-Lagging Ratio bottomed near the end of the recession and was declining throughout the recession.
Over the past decade, global cyclical stocks and the dollar have tended to move in inverse directions. Whenever the dollar weakens, like in the first half of 2009 and the second half of 2010, cyclical stocks have tended to outperform the broader market.
Over the past decade there has been a very strong relationship between US 10-year treasury yields and the gold/copper ratio. As the gold/copper ratio increases (i.e. gold becomes more expensive relative to copper), yields have fallen to the tune of an -85% correlation.
There are fears that the world is on the precipice of turning back the clock on globalization. In some ways, the case can be made globalization has been retreating since the financial crisis. One of the strongest supporting data points of that argument is world trade data.
On 11/4/16, the 65-day correlation between between the S&P 500 and US 10-year treasury yields was as negative as it had been at anytime since June 2007. The 65-day rolling correlation was -30% compared to a 73% correlation that had occurred just a few months earlier in June.
For the first time since 2011-2012, inflation surprises are positive in many parts of the world. The Citi Inflation Surprise Index is at the highest level since 9/2011 in Asia-Pacific, it’s at the highest level since 10/2011 for the Eurozone, and it’s at the highest level since 5/2012 in the emerging markets.
It is somewhat hard to believe but oil prices are up nearly 90% over the past year. The past two times oil prices have increased this much year-over-year, US 10-year bonds rallied quite significantly. In 2008, oil was up over 100% in July and bond yields were hovering just over 4%.
The latest NFIB Small Business Survey was a blow out report if there ever was one. Small business optimism increased to 105.8 in December from 98.4 in November and well above expectations of 99.5.
‘Quality’ is one of the those terms in finance that if you ask three different investors to define you get four different answers.
For the past couple of months, and especially since the US presidential election, US financial stocks have been on a great run. On an equal-weighted basis, US mid and large cap financial stocks are up a scorching 16.7% over the past 50 days.
At least since 2003 (which is when our data on TIPS begins), the dollar and breakeven inflation expectations have had a negative relationship. Said differently, when the dollar strengthens (as it has done recently) inflation expectations tend to fall and vice versa.
The December Conference Board Consumer Confidence survey had some interesting results. One of the more noteworthy changes were in regards to equity price expectations.
Most of the time not a whole lot actually changes in the markets over the course of a month. For example, small cap stocks tend to outperform large cap stocks by a rather mundane 31 bps over the course of a month on average going back to 1996.
The Fed has communicated that the plan for 2017 includes three rate hikes. The market isn’t quite buying into that plan yet.
According to the Fed’s dot plot, the fed funds rate will be 2.125% be December 2018. This is about 40 bps higher than what the current Dec 18 fed funds futures contract is pricing in.
The US has outperformed the MSCI World Index by over 26% since the 3/9/2009 low while the rest of the developed world has dramatically underperformed.
The recent increase in interest rates have already hit the mortgage refi market and higher rates look like it may be a headwind to the overall housing market in the first half of next year.
Recent inflation fears have helped lead to a sell off in bonds. From a total return perspective, the 30-year US treasury has declined by 13% and the 10-year US treasury has declined by 6% over the past 100-days.
The high yield spread over the 10-year treasury has synced up to changes in breakeven inflation.
The 200-day correlation between US stocks and the MSCI World Index is currently 45%. This is the second lowest level since 2008. The only time the 200-day correlation was lower was in July 2014.
The recent backup in yields is happening at an unfortunate time. In nominal terms, debt held by the public is at an an all-time high (approximately $14.3 trillion).
It has certainly been a good couple of weeks for financial stocks. But the good times still haven’t been good enough to bring bank stocks out of last place among 24 developed market industry groups.
Since the introduction of the National Income and Product Accounts (NIPA) in 1946, the US has experienced 11 recessions.
As U.S. equity markets continue to forge new highs, we take a look at our strong and weak close indicators to gauge investors’ conviction levels in the latest moves.
Listen, before we go through a litany of economic charts that pour some cold water on the recent bout of optimism regarding US economic growth prospects we want to stress that we don’t believe economic growth is about to fall off of a cliff.
Regardless of the series you use, the USD seems to have broken out of a 20-month trading range and is trading at the highest level in well over a decade.
More than one out of five developed market stocks and more than two out of five emerging market stocks are in a bear market (down over 20% from a high) in the past 200 days.
We all know that stocks are a leading indicator of economic growth and disappointingly recent breadth measures suggest that economic activity may slow over the next several months.
Back in September we explained how US treasury yields were at parity with foreign government bonds for many foreign investors (namely euro and yen-based investors) from a currency hedged basis.
General consensus seems to have quickly moved to a view that a Trump administration is going to be inflationary for the US and the global economy.
Investors love to toss around fundamental data points that are pretty meaningless without context.
Brazil’s trade data in October was abysmal. Exports fell 10.2% year-over-year to $13.721 billion and imports fell 15% year-over-year to $11.375 billion.
October was a pretty good month, all things considered, for economic data out of Europe. Industrial production out of Germany, Italy, France and for the Euro-Area aggregate all surprised to the upside.
Neither the bulls nor the bears are winning the equity market battle right now. When markets have strong momentum, either positive or negative, than you tend to see big spikes in 20-days highs (when positive) and lows (when negative). Currently, we see neither.
Since the summer of 2015 the long gold, long 10-year US treasury trade bonds has basically been one in the same (silver and treasury bonds have moved in tandem as well).
A primary concern of central bankers is that in a deflationary environment consumers change their expectations regrading the future level of prices.
High yield investors have had a much different experience in 2016 than they did in 2015 (fortunately for them). The high yield spread over 10-year treasury yield blew out from 375 bps in June 2015 to 844 bps in February 2016.
There seems to be several compelling reasons at the moment to mine developed market Asia for new equity investment ideas.
We all know that the Fed has committed to keeping its balance sheet extraordinary large for as long as they feel the weak economy justifies this accommodating position.
