As we look into the second half of the year and into 2020, we are left with a fleeting feeling about the prospects for a cyclical uptick in growth and therefore earnings. The problem is not so much with the current pace of growth or incoming data (which by the way hasn’t been very good).
Despite the S&P 500 having made a new all-time high just a few weeks ago, many of the supposed market leaders have not kept pace.
The announced tariffs have come at a rather inopportune time, economically speaking.
The relationship between the performance of emerging market stocks and the US dollar is one of the tightest macro relationships that exists in investing.
Last week we wrote how the US dollar could be in for a major move when it breaks up or down out of the major consolidation it has been in for the better part of six months.
The US dollar is on the cusp of making a major move. The question is which way will it go, higher or lower? The directional movement of the US dollar will have significant asset performance implications once the tug of war between dollar bears and bulls is resolved.
So far this week, we’ve received a few data points that reinforce the manufacturing slowdown taking place in the US. Below is a calendar of events for the last couple days.
The tale from some of the most cyclical and predictive economic indicators are telling investors two very different things at the moment. Copper, the metal with a PhD in economics is giving us the all-clear sign while lumber, which is perhaps only regarded as having a master’s or bachelor’s in economics, is saying, “be careful.”.
The IMF made news yesterday by announcing its latest updates to 2019 GDP growth around the world. It guided global growth down and made an especially large cut to Eurozone growth estimates, bringing them down 30bps since January to 1.3%.
Yesterday’s stocks reacted to a raft of overnight foreign economic data that it perceived positively. In this note, I’ll run down the data and my doubts about that reaction. The hits began with China’s Markit manufacturing PMI jumping to 50.5.
Investors have been given another slug of wanting housing data this week. First it was building permits which surprised to the downside and today it was pending home sales, which fell 4.9% YoY vs expectations of a 1.8% drop.
To the dismay of many observers, US treasury yields have been dead as a doorknob despite the 20% rally in stocks over the last three months. In fact, the US 10-year yield is on the verge of breaking below the 2.56% level it reached on January 4th when recession concerns were flaring.
Last week we were presented with a fairly cold employment report with the number of job gains being lowest in 18 months and one of the lowest readings in the last decade.
The big news of the day relates to the continuation of a trend that has been going on since 2013: the widening of the trade deficit. The trade deficit in dollar terms at $-59.8bn in December and $-622bn for the year broke down to a new 10-year low.
In Part 1 of this series we talked about the lagged effect of interest rates and money growth, AKA “financial conditions” broadly speaking, on economic growth.
With US stocks up 11% YTD and nearly 19% since the Christmas Eve low, one could surmise that the economic slowdown that occurred in the back half of 2018 both globally and in the United States was a thing of the past, or at least would be over soon.
Credit markets often move before the equity markets, and this can offer helpful information about the near-term path of equity prices. In general, I like to see credit confirming what the equity markets seem to be saying. When credit stalls, like it is now, I take notice.
Several weeks ago we did some research to find out what a typical rally looks like after a big waterfall-like decline takes place.
As many commentators have pointed out, the yield curve has developed a sort of humped form in recent months. That has led many to speculate about when the yield curve will invert, foreshadowing a recession. If, as the logic goes, the yield curve is about to invert then we all better take cover.
Knightian uncertainty is named after University of Chicago economist Frank Knight (1885–1972), who distinguished risk and uncertainty in his work Risk, Uncertainty, and Profit. The concept of a separation between risk and uncertainty is an important one right now given how severely politics are driving markets.
The “blowout” employment report, while strong in some respects, should be taken with a grain of salt. It’s important to remember that employment is a lagging indicator. Payroll employment often peaks either at the beginning or middle of recessions, so it provides virtually no warning of impending danger.
The slide in oil prices in October accounted for most of the move in 10-Year US Treasury bonds via the inflation risk component of the term premium. The two series are always highly correlated and this is a mechanism through which oil price changes are incorporated into US Treasury pricing.
As a conceptual exercise, it may be useful to frame the current episode of market volatility (both upside and downside volatility) from the perspective of the stock market declines in 1998 and 2000.
So here we are, having added 10% to the value of stocks from their Christmas Eve low when we listed a baker’s dozen reasons why stocks could tactically rally from there.
The oversold condition in stocks that has developed over the last several weeks is more than trivial. I highlighted on Christmas Eve the baker’s dozen reasons why equity markets could tactically rally from that point, showing extremes in a variety of indicators.
The S&P 500 experienced a waterfall decline in December, something rarely seen. Measuring the decline using a 30-day Wilder Relative Strength Index, it is clear the extremes recently experienced.
Stocks plunging to new lows on the year and to the lowest level since early 2017 is no way to bring in the holidays. Investors are in panic mode, with precious few precedence of this level of sustained selling outside of the 2008 meltdown.
2018 has been kind to corporate profit margins. In fact, the margin expansion we’ve seen so far in 2018 is unprecedented in a late cycle economic environment when wages are rising briskly, at least looking back over the last thirty years.
One of the more well-recognized Now-Casting data series is the GDPNow series produced by the Federal Reserve of Atlanta. Every day they incorporate economic data releases and update their estimate for GDP growth in the current quarter. GDPNow is a great source of information on the real-time performance of the US economy.
The Federal Reserve is in the midst of an historic tightening cycle, and it has begun to impact the economy.
The equity markets no doubt experienced a powerful move today on the back of Fed Chair Powell’s dovish remarks mid-day. Specifically, his comments laid the groundwork for a pause in interest rate hikes in the first quarter of 2018.
It goes without saying that the most rate sensitive areas of the economy should feel the burn from higher rates first. It’s useful, therefore, to look at the performance of those sectors to get a read on the impact that changes in the rate environment are having on the real economy.
Value investing, which is often traced back to Ben Graham in the 1940s, is among the most influential trends in finance in recent decades. Value investing is based on the idea that lots of stocks are out of investors’ favor because of a myriad of reasons, such as recent losses, management upheaval (think GE), product failures, etc.
Oil prices have swung drastically over the last couple months. The market was unprepared for the US to grant waivers amounting to nearly one million barrels/day to fill the void expected to be left by the drop in Iranian exports. Instead of Iranian exports plunging to almost zero by November...
I am not optimistic about reversing the trend of the ever-rising estimates, but I found a way of substantially improving their accuracy and reliability, thereby enhancing the usefulness of reported earnings and asset values to investors.
The selling over recent weeks has been fast and intense, providing investors almost no relief. This type of short-term selling pressure has reached fever pitch levels that is usually indicative of some sort of relief rally, even if the ultimate lows are still ahead of us.
Energy is the best performing sector in four of six market-regions. (From two market groups, Developed and Emerging, and three regions, Americas, EMEA, Asia, we get six market-regions.) Among Developed Market sectors, energy is 5th YTD, down about 5% less than the MSCI All Country World Index.
Third quarter real GDP came in at a 3.5% QoQ annualized rate for the third quarter, above expectations for a 3.3% growth rate. The growth rate itself wasn’t much of a surprise, and frankly, neither were the drivers of growth.
Steve and Bryce dissected US Treasury bonds, discussing the message of the rates market and how this is directing asset allocation.
Today, economy watchers were treated to more of the same from the housing market. That is, more weak numbers suggesting we may have seen the peak in housing activity for the cycle.
Everyone knows that accounting is boring (not when I teach it, though), but, at least, people think it’s factual. No fake news. After all, accounting comes from counting―counting money, units of inventory, etc. All facts. Nothing further from the truth.
Today’s story begins with the once-behemoth that is the American retail firm, Sears. In the last week of September Sears’ stock dipped below $1 a share, reducing the company’s market value below $100 million. Sears may still linger on a bit, but when a big firm falls into penny-stock territory, its outright liquidation is a foregone conclusion.
Overnight, new data released in China suggests businesses are having a tough time lately. Cheung Kong University produces an alternate PMI Business Conditions Index in association with the China Federation of Logistics and Purchasing. The latest data point plunged more than 10 points from its end of July reading and is currently sitting at 41.88, deep into contraction territory.
Is last week’s 18 basis point selloff in 10 year government bonds the start of a bond bear market or a market adjusting to the realities of the time, albeit in a somewhat disorderly way? The answer to this question has obvious implications for not just bonds, but all asset classes from equities to commodities to real estate.
The Chinese stock market is closed this week for the Golden Week holiday. On this side of the Pacific the markets have been busy this week with US Treasury bond yields breaking out and stocks selling off—especially technology—based on the revelation that China implanted devices in technology products shipped to the US.
Sooner or later, higher mortgage rates (which are keyed off of the 10-year treasury yield) were always bound to start slowing the housing market. It was more a matter of what level of rates would be necessary to take the first bites out of housing.
Among the major groups of stocks around the world that we follow, US small-cap stocks have been the best performer over the last decade as the USD experienced a strong bull market. US small caps have outperformed our mid/large group of developed companies by almost 40% over the last 10 years.
Over the summer, some groups within the global equity market sold off sharply, leading to the current trends of poor performance and weak breadth. Foreign stocks, cyclicals and value-oriented sectors were the hardest hit.
The Phillips Curve (the relationship between wages and the unemployment rate) finally awoke from its slumber with today’s unemployment report showing private sector wages rising 2.9% year-over-year and non-supervisory wages rising 2.8% year-over-year, the fastest growth rate since 2009.
As many have documented, the main channel of transmission for the Fed’s quantitative easing policy was via the term premium component of US treasuries. As the Fed’s balance sheet doubled from 2010 to 2015, the term premium embedded in US Treasuries fell from 2.5% to -75bps. The Fed is now shrinking its balance sheet, which on the surface would seem to suggest a rising term premium.