Saturday, March 23, 2019

This Week's Message: Scary Yield Curve, Scared German Manufacturers, and What's Really Troubling the Market...

The consensus among financial pundits is that yesterday's global stock market drubbing was catalyzed by the inversion of the Fed's favored yield curve signal; the 3-mo/10-yr treasury yield curve.

During "good" times the curve should possess an upward slope (10-yr yield higher than the 3-mo yield), while an inversion of the curve (3-mo yield higher than the 10-yr yield) is a warning sign that the good times may be coming to an end.

The reason why Friday's flipping of the yield curve may have been such a shocker for stocks is the widely-known (and respected) fact that since 1962 every single recession was preceded by an inversion!

Now, not to throw warm water on such a chilling development, but I have to add that not every inversion since 1962 was followed by a recession. Meaning, there have been occurrences when the curve inverted then re-steepened before re-inverting ahead of a recession.

Here are our graphs of the 2-yr/10-yr relationship (top panel) and the 3-mo/10-yr (bottom panel). The 2s/10s is the one we include in our macro index; plus, our database offers us a longer look at that particular curve. A dip below zero occurs when the long-term yield moves below the short-term (inversion). I circled the inversions that did not presage a recession:

click to enlarge...


Also note, if indeed Friday's inversion turns out to be a harbinger of the next recession (and bear market), we're, on average, still 18 months out.

Bespoke Investment Group, in their weekend commentary, addressed the historical implications for stock market returns immediately following yield curve inversions.

As you can see, if indeed, as the overwhelming message from the financial media suggests, Friday was all about the inverted yield curve (not my opinion btw), we probably should resist running for the exits just yet:



As I suspect you'd agree, prudence demands that one not take one indicator as market-timing gospel, rather, one should address it in the context of the overall macro picture.

Our PWA [Macro] Index scored a +27 this week, off 6 points from last week. Our financial markets subindex declined as a result of somewhat weakening stock market breadth on a sector-by-sector basis, along with a decline in overall short interest (folks betting on a fall); the latter being a contrarian indicator (generally, the more the bears there are [outside of recessions], the more the potential fuel to push stocks higher on any snippet of good news). The inverted yield curve took our financial stress subindex down a bit, while falling commodity prices along with a declining Baltic Dry Index (tracks the cost of shipping raw materials across the world's oceans) shaved 4 points off of our economic subindex.

Here's a two-minute video illustrating the historical importance of our analysis:

Once playing, click the icon in the lower right corner for full screen. Focus should occur after a few seconds; if not, click the wheel to the left of the YouTube icon to adjust:


Per the video, our analysis does not yet have us moving to a defensive posture.

On top of the yield curve news -- and widely reported in the media -- Germany posted an abysmal (recession-ish) manufacturing Purchasing Managers Index (PMI) first thing Friday morning; further calling global economic conditions into question. Interestingly, Germany's services PMI came in firmly in expansion territory; a development completely ignored in the financial press. 

While I suggested above, that, in my view, Friday's selloff catalyst was not the yield curve, or Germany, I do believe that they absolutely added to -- and validated -- the angst the world is feeling over the prospects of further disruptions of trade flows, supply chains, and, thus, the waning of general economic sentiment directly resulting from the ongoing U.S./China trade war, and the serious threat of coming trade tensions between the U.S. and Europe.

Make no mistake, if indeed we're not nearing the end of this unique bout of protectionism, the global economy, and equity markets, will have a very tough time of it going forward. The good news is that the political risk of such a scenario is monstrous! Which strongly suggests that such a long-term scenario is unlikely to unfold. But, boy, we'll be keeping our eye on it!!

Bottom line for now: A generally okay macro backdrop, decent valuations, sufficient pessimism (potential market fuel), and amazingly dovish central banks sets a nice stage for stock market performance going forward.

Here again (originally shared with you on 3/13) is my abbreviated current 6-month base case (with followup commentary in blue):
1. Accommodative central banks, and governments, will stimulate in aggressive-enough fashion; sufficient to stave off recession this year (and likely next).
The Fed just announced that there'll be no rate hikes this year, and that they'll be ending their balance sheet roll-off in the fall.
2. The U.S. will ink a deal with China that will see a sharp short-lived rally in stocks. That will embolden Trump to threaten hardball with Europe. Global equities (save for China) will immediately tank when markets sense such. Equities tanking will bring the sides together quickly to mend fences and make a deal. Monetary and fiscal easing will have bolstered economic sentiment enough to sustain the relatively short US/EU tiff.
The President has been sounding off about Europe as he signals that a deal with China is forthcoming.
3. Article 50 will get extended, the hard-Brexiteers will soften and a deal will be struck later in the year. The extension will relieve pressure on the pound, UK and EZ equities.
A one-month delay was announced last week.
4. Global equities will trend higher into the fall. Bonds will hold up (yields will hold down) until trade issues are resolved; trending lower (rates higher) thereafter on the prospects for accelerated growth and tighter central banks. The Dollar -- despite the prospects for rising U.S. interest rates -- will trade lower on the prospects for the rest of the world’s economies/asset markets catching up.

What can go wrong?

1. Trump walks away (with no near-term path for turning back) from a China deal. Hugely bearish for stocks! Recession risk explodes higher and we get busy adjusting client portfolios.

2. A deal gets done, but existing tariffs remain. Not as bad as no-deal, but stocks will nonetheless sell that news.
The President, alas, promised precisely that last Wednesday morning. The Dow closed down 140 points Wednesday (after a huge intraday rally on the Fed announcement), and down 469 points Friday (after a 240-point rebound on Thursday).
3. The coming row with Europe gets under the key players' skins to the point where they abandon their economic/market-centricity and we have a protracted US/EU trade war; which means general sentiment tanks, taking an already weakened economy with it. And we get busy.

4. Brexit blows up and sparks a cascade in European equities that ripples across the globe. Best case scenario, 10-20% correction; worse case, global sentiment tanks to the point of catalyzing the next recession. And we get busy.

5. 
 #1 or #2 and #4 both occur this year. And we get busy!

We'll keep you posted.

Have a nice weekend!
Marty


Friday, March 22, 2019

Perspective On Today's Selloff (video)

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This Morning's Log Entry: We need a selloff right here!

Wednesday’s rally on the Fed decision, then the plummet immediately following Powell’s press conference made perfect sense to me – after hearing Trump proclaim that he has no interest in rolling back tariffs as part of a China deal. Therefore, Thursday’s big rally surprised me – I was absolutely expecting follow through selling.

Thursday, March 21, 2019

Still -- for the moment -- Skeptical

This morning's very strong rally is simply that, thus far, very strong. Volume is above average and breadth (advancers vs decliners) is outstanding!

Last Night's Log Entry

Here's an excerpt from last night's log entry. And, per paragraph two, stocks are set to open lower (although could be, or get, worse) this morning:

This evening China is surprisingly (although the Fed announcement was extremely bullish for EM [bearish the dollar]) trading higher, as are SPX futures, although the latter are losing steam at the moment.

Wednesday, March 20, 2019

Brief Commentary on the Latest Action (video)

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Unfortunate Headline of the Day!

Not the headline the market was looking for!

Tuesday, March 19, 2019

This Evening's Log Entry

Stocks completely gave up what was an impressive move further above what had been stiff resistance. The selloff was in response to news that Chinese trade negotiators were backing away from what had been pre-commitments on issues around intellectual property. Followup articles reported that China’s threatened reversal is inspired by the U.S. not committing to the rolling back of tariffs introduced by the Trump administration.

Headline of the Day

Stocks, in a virtual instance, gave up the majority of their gains this morning on the following headline:

This Morning's Log Entry

The market is rallying this morning on the latest EU/UK developments virtually assuring a Brexit delay, and on expectations for an un-eventful wrap up tomorrow of this week’s Fed meeting. A rebound in Boeing, as well, is helping the Dow. 

Saturday, March 16, 2019

This Morning's Log Entry

My short-term chart character analysis to end last week speaks bullishly about global equities’ prospects in the near-term, but somewhat discriminatorily:

Friday, March 15, 2019

Quote of the Day

The snippet below from Econoday's highlights of today's U.S. Industrial Production report speaks to what we've been preaching herein ad nauseam for the past couple of years: Protectionist policies (read tariffs) -- as I attribute no small measure of the present global slowdown to such -- are unequivocally no way to promote a nation's economy at large, let alone even the sector(s) such acts are ostensibly designed to protect:  emphasis mine...

This Week's Message: Encouraging Breadth (video)

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Thursday, March 14, 2019

This Morning's Log Entry

Clearly, Trump is bothered by pundits in the media suggesting that he’s desperate for a China trade deal. Thus, he’s pushing back with statements that he’s “in no hurry”, that he “could walk away”, and so on. Additionally, the latest stock market strength, he believes, gives him that prerogative.

Wednesday, March 13, 2019

Today's Log Entry

I need to preface this one with a huge caveat: While it might appear that I am making a prediction in today's entry to our internal market log, that's not how I view it. Instead, my current (always subject to change) "6-month thesis" (abbreviated version below) is simply the laying out of my current (always subject to change) base case.

Brief Commentary on the Latest Action (video)

Once playing, click the icon in the lower right corner for full screen. Focus should occur after a few seconds; if not, click the wheel to the left of the YouTube icon to adjust:

Friday, March 8, 2019

This Morning's Log Entry



China’s trade activity has plummeted, relative to expectations, European growth has been subdued and the U.S. is clearly showing cracks; virtually all of it related to slowing global trade, and the uncertainty/fear that it engenders.

Thursday, March 7, 2019

Brief Commentary on the Latest Action (video)

Once playing, click the icon in the lower right corner for full screen. Focus should occur after a few seconds; if not, click the wheel to the left of the YouTube icon to adjust:

Wednesday, March 6, 2019

This Morning's Log Entry/This Week's Message: It's All About U.S.-Messaging On Trade!

China continued its strong rally overnight while U.S. equities remain in apparent consolidation mode below 2800 on the S&P 500 and above its 200-day moving average.

Tuesday, March 5, 2019

Long-term Signal Encouraging (video)

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This Morning's Log Entry

Chinese equities bucked the trend last night by not following Wall Street’s lead lower; the Shanghai and Shenzhen indexes closed up .9% and 2.2% respectively. New fiscal and monetary stimulus, along with the promise of a trade truce, is inspiring a risk-on mood in China.

Monday, March 4, 2019

Are We Staring Into a Sell-the-News Scenario?

A growing theme among market pundits is that the ending of the U.S./China trade spat is already baked into the stock market; i.e., it's a "sell the news" event. Hence today's selloff.

Waiting for Detail

The S&P's down 32 points as I type, the Dow's off roughly 360; volume's a little below average for this time of day (suggesting there's no panic in this morning's action). Early on we saw both indices nicely higher on news that a trade deal is near. 

This Morning's Log Entry


This week’s important data releases (construction spending, ISM Services, new home sales, Beige Book, jobs, etc.), barring any huge surprise in the jobs number, will be overshadowed by trade headlines. Domestic politics will continue its steady stream of sound bites that have, thus far, been ignored by markets. Asian markets closed higher, although well off of their overnight highs, U.S. equity futures are set to open higher.

Sunday, March 3, 2019

Politician Do What Politicians Do, The Unfortunate Headline of the Day, And You're Likely Missing the Point...

Updated Tuesday 3/5/19

Indian Prime Minister Narendra Modi rode to office on the promise of massive economic reform, job creation, and so on. And, yes, a number of measures have indeed moved the needle and inspired a great amount of foreign capital interest in India's huge potential.

Generation Z May Surprise You -- OR -- Is Millennial Socialism a Byproduct of a Strong Economy?

So, do the macroeconomic conditions prevailing during one's upbringing impact one's idea(s) of how things should be?

Recently I offered my two-cents on "millennial socialism", as, apparently, per the polls, a large swath of millennials share "socialist" values. The following, from Visual Capitalist, introduces us to the next generation to enter the fold; Generation Z, those born between 1997 and the early 2010s, who make up 25.9% of the population.

Saturday, March 2, 2019

Brief Commentary on the Latest Action (video)

Once playing, click the icon in the lower right corner for full screen. Focus should occur after a few seconds; if not, click the wheel to the left of the YouTube icon to adjust:

Friday, March 1, 2019

This Morning's Log Entry


2/29/19 (7:18am)

A 200+ point Dow move on positive trade news and decent overnight data has faded on a weaker than expected ISM Manufacturing survey and a consumer sentiment reading dropping 2 points for February.

This Week's Message: The Fed 'Ultimately' Back In Play Would Be A Good Thing!!

The Caixin Manufacturing PMI for China came in just a shade below 50 last evening, which was a marked improvement over the previous month. Asian equities moved from red to green on the news, rallying hard into the close on that and on positive trade news.

No Worries Over the Housing Market

If you've been worrying about the current state of the housing market, well, you can stop now.

Here's Bespoke Investment Group's summary of yesterday's data release: