Saturday, November 17, 2018

This Week's Message: Seeing Some Stress, Seeing Some Strength, Seeing More Near-Term Uncertainty

We absolutely have our concerns over the present trajectory of the global economy. However, as our direct experience, as well as our study of economic/market history, instructs, long-term trends are forever interrupted by counter-trend fluctuations. 

That said, we remain on the watch for signs that what we might've initially suspected was a counter-trend move could in fact turn out to be the beginning of an entirely new trend. Of course an entirely new trend from here would ultimately mean an economic contraction and a bear market in stocks.

Our latest macro analysis, while showing some stress in certain indicators, remains constructive: The PWA Index rose fractionally week-on-week to 36.05. Under the surface we're noting an increase in financial stress, as credit spreads have widened a bit due to the plunge in oil prices and uncertainty abroad (Brexit and Italy, for example), which was offset, however, by a 6-pt increase in the "General Economy" subindex (improvement in U.S. and China Econ Surprise Indexes and a declining NY Fed Underlying Inflation Gauge). Our "Financial Markets" subindex jumped 9 points on a decline in adviser sentiment (a contrary indicator that currently sits at a level that often precedes strong up moves in equities), a tamer VIX curve (measures implied volatility in S&P 500 options 1 to 6 months out) and an improvement in our breadth reading of the S&P 500 index. 

Again, what we're looking for are signs that the good times are coming to an end, and that it's time to batten down the hatches. Which, as noted above, is not something we're yet seeing in our overall assessment of economic conditions -- certainly not, per the following, when it comes to the flow of goods across America!

The Cass Freight Index is something we pay close attention to. Here's from the latest report: 
"Despite all the recent turmoil in the financial markets and the resulting concerns about the strength of the economy, the Cass Freight Shipments Index is clearly signaling that the U.S. economy, at least for now, continues to be extraordinarily strong. Simply stated, when shipment volume is up 6.2%, it is the result of an expanding economy. We are hard pressed to imagine a scenario, sans a catastrophic geopolitical event, in which such a strong rate of freight flow expansion was possible or even a precursor to an economic contraction. Our confidence in this outlook is emboldened by the knowledge that, since the end of World War II (the period for which we have reliable data), there has never been an economic contraction without there first being a contraction in freight flows. Conversely, during the same period, there has never been an economic expansion without there first being an expansion in freight flows." 
That optimistic message aside, as for the equity markets, expect more of the highly volatile action we've seen of late. Among other immediate uncertainties (such as the fate of Brexit, Italy's political woes, and the latest on the Saudi journalist's murder), after a positive finish to last week inspired by optimism over trade, U.S. VP Pence and Chinese President Xi offered up competing narratives that sounded anything but conciliatory. We'll know how the market views that (and other "immediate uncertainties") first thing Monday morning.

Have a nice weekend,

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