Bloomberg's Cameron Crise this morning speaks to what has stocks green at the open:
"When you are a bull, everything looks like a red cape, which kind of explains how the market is likely to interpret this morning’s data. The salient features were a downward revision to the Q3 core inflation index, a downward revision to last quarter’s household spending, and downside surprises to October inventory data (which should produce a downgrade to current-quarter growth estimates.) That all casts a dovish hue on the policy backdrop..."
All of which denotes a slowing economy, which of course is to be expected if the 2024 recession narrative is to play out... In the meantime, as is typical at this stage, confirmation of such, is, ironically, bullish for stocks.
I can’t emphasize enough how markets, (monetary) policymakers and politicians are so stuck between the proverbial rock and a hard place... Folks are asking if next year’s election gives us any pause in our economic assessment (recession odds elevated), for, as we know, all conceivable strings are pulled by incumbents to bolster the economy as election times near.
Yes, we've touched on this plenty of late, but, again, per our weekly results update below, the divergence among equity sectors this year has been utterly shocking... And while indeed a serious broadening (the 8 of 11 sectors that are, let's say, not having a magnificent year playing catch up) may be in the offing, history offers up some serious red flags to consider.
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Comments made by Hedgeye CEO Keith McCullough in today's Macro Show resonated with me, and has me calling up the following from my video commentary this morning:
"Let's see this for what it is; this is not a time, from these levels and from this stage in the cycle, to expect that the next new raging bull market is about to begin...
Toward the end where I mention jobless claims, I suggested that a weak number would be bullish for stocks (given the present character of the trading), I actually meant that a strong number (denoting a weak labor market) would be bullish... Now, go figure, the number was weaker than expected (denoting a strong labor market) and equity futures didn’t budge... Although, I should add that last week’s number was revised up (weak sign), and Nvidia didn’t whiff yesterday... Hmm...
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As we gear up to produce our deep diving, and typically lengthy, year-end message, we think it appropriate, given present market dynamics, this year to focus a good bit on risk.
While organizing my thoughts and perusing my library of related content/literature, I came across a quote that our current assessment of the near-term risk/reward setup inspires me to share right here.
And I must say, having lived intimately with, and managed through, the tech bubble -- while unpopularly (among some clients) reducing our tech exposure (in 1999) during the final massive runup -- I deeply sympathize with the following, from Howard Marks' exceptional book "The Most Important Thing:"
This, from Howard Marks, captures the messaging herein of late:
"...you’re unlikely to succeed for long if you haven’t dealt explicitly with risk. The first step consists of understanding it. The second step is recognizing when it’s high. The critical final step is controlling it."
Peter Boockvar and I have seen a few rodeos in our day... Listening to an interview with him recorded yesterday; I couldn't agree more with the following:
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In this morning's video (recorded yesterday) I mention Walmart's outlook on the consumer... To really pound home their expectations; this from the CEO:
"We may be managing through a period of deflation in the months to come."
I can not stress enough what such a scenario would do to corporate earnings, particularly this go-round.
Premium research provider Numera Analytics, like us, sees late cycle dynamics at play, and is, thus, cautious on equities right here... They, also, per their just-released Global Asset Allocation Report, nevertheless see opportunity in certain emerging markets:
Amidst our constant reminders that the present equity market setup remains somewhat precarious, we also continue to hint that our go-forward thesis sees unique global opportunities ahead -- beyond, that is, what's left in the current cycle.
Crescat's Tavi Costa points to one that we agree makes great sense going forward:
Yes, resource-rich economies, both from a valuation standpoint and given our view on the dollar during the next cycle, are one of those opportunities... Whether or not now's the time to take on full positions, well, that remains to be seen.
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This morning's CPI report comports perfectly with our current and go-forward theses... Current being the market reaction (up) to a weaker than expected print, the go-forward being that weaker inflation is 100% consistent with a weakening economy... The market reaction also, as I've been pointing out in the video commentaries, comports on balance with the short-term technical setup for equities, yields and the dollar.
Not much to add this morning to Friday and Saturday's video commentaries... CPI tomorrow, retail sales Wednesday, earnings announcements, Fed speakers, and, alas, the government shutdown circus I suspect will give us plenty to comment on over the next few days.
Here's your weekly sector, region and asset class results update (and a quote to ponder):
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Diane Swonk is a very good, thoughtful, objective economist... This morning's message is all her:
"One lesson I learned early in my career was that consumers will resist, with everything in their power, reductions in their standard of living. Later I learned that it was not just the amount people accumulated that mattered, but the pace at which they accumulated stuff that became so entrenched. A version of keeping up with the Joneses played out en masse.
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Like I keep saying, last week’s rally in stocks comports perfectly with our present thesis… The economy will likely enter recession next year, and as the data turn down, equity markets initially turn up as traders and investors have grown to believe that stocks always rise when the Fed cuts interest rates.
Here are the highlights from Bloomberg's Tatiana Darie's warning about the signal in Caterpillar's latest numbers (which [Cat's global sales growth], btw, happens to be one of the 47 inputs to our PWA Index).
Emphasis mine:
Caterpillar Is Sending a Warning About the Economy: Macro View (Bloomberg) -- Caterpillar earnings spooked investors, who saw a drop in its order backlog as an ominous sign for the global economy. At least for the US, its largest market, that holds some truth, which means it’s also a warning for the stock market.
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We published this month's equity market conditions report (the intro to our internal analysis) in a separate post, as Monday's will be long enough with our weekly sector, region and asset class results update:
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In yesterday's chart of the day, I illustrated the point that, at this juncture, weak economic news is strong stock market news... I think I've expounded sufficiently as to why in our latest commentaries... The other thing the equity market has going for it is resoundingly sour sentiment, all of a sudden.
The setup is pretty similar to what we sniffed out at the beginning of October.
As clients and regular readers have no doubt noted, while the next leg of the current bear market (should there be one) will be characterized by declining corporate earnings amid notably weakening economic conditions, in our view the latter, in its early stages, will, ironically, very likely inspire a potentially not-small rally in stocks.
In today's chart of the S&P 500 below, I green X'd the moment the ISM Manufacturing Survey for October was released, and two spots during Fed Chair Powell's press conference:
As for the ISM survey, expectations had it coming in at 49, which just barely denotes contraction... The actual reading, however, was a surprisingly low 46.7, sending it (the manufacturing sector) deeper into recession territory...
And, lo and behold, stocks immediately popped higher on the release -- validating our latest messaging herein.
As for that volatility around Powell's presser, when he came out of the gate with some tough talk on remaining vigilant, stocks bolted lower -- the market is desperate for the Fed to lighten up (not considering the conditions [and the earnings setup] that will actually make that happen) -- he then proceeded to celebrate the progress they've made thus far 😕, and to essentially not say anything to further upset the market applecart right here.
As I've pointed out in the last 3 video updates, the technicals were also pointing to pretty strong odds of a rally right here.
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Our last 2 video commentaries pretty well cover our view of the short and long-term scheme of things... I.e., according to the technicals, odds favor a near-term rally in equities, according to the fundamentals, continued caution is very warranted.
In case you missed them:
Technicals Point To A Near-Term Rally, But, Ultimately.....
The Consumer, Market Signals, Earnings Call Insights and Yes, We're "Late in the Game"
And here's your weekly sector, region and asset class results update:
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While Q3 GDP came in better than expectations, its underlying inflation gauge came in softer than expected... Combine the latter with higher than anticipated weekly unemployment claims (particularly continuing claims, as I highlighted in last Friday's economic update), and a clearly dovish ECB monetary policy statement, and you get a knee jerk market reaction which entirely comports with our short-term view (bad economic news = short-term good news for stocks).
Here's SP500 futures action so far this morning -- it's presently10 minutes before the open (the green arrow points to the moment the GDP and jobless claims numbers were released):
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Long-term treasuries rallied yesterday, seemingly sparked by Bill Ackman’s assertion that the world is simply too risky to be short bonds right here… While, per below, his comments did inspire some buying, I have to believe that, at these levels, investors are poised to pounce on treasuries on any sign of economic weakness going forward… And that’s despite the high level of issuance to come.
Ackman tweeted his comments at 6:45am.
Here's TLT (long-term treasuries) yesterday, I circled 6:45am:
If you've been tracking our weekly results updates you've noticed, of late, a growing shade of red... As we've maintained since the October '22 bottom, macro dynamics have remained such that a next leg down carries odds too high to ignore.
Now, many on Wall Street have taken the stance that the bear market is over and done, and that a new bull market is just getting underway.
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Just a quick note this morning; anything more from me today would be simply redundant.. I.e., not much more to report beyond our latest written and video messaging... Not much, that is, other than yesterday's 20-year treasury bond auction, which came as quite the surprise to the market, and, given the messes that were last week's auctions (mentioned in Friday's important video update), to yours truly as well.
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Two points I'd like to make in the opening to this morning's message:
1. I am indeed in the camp that believes AI is a real long-term game-changer.
2. Like I said yesterday, "... today's CEO has been reduced to little more than shepherd of his/her company's stock price (quoting Julian Brigden)"
Now, with regard to my view of AI, the operative words there are "long-term." In the short-term, however, per last Monday's Wall Street Journal, there are issues that those Q2 earnings calls conveniently failed to mention (or at least emphasize).
So, Q4 of the year is known for its friendliness toward the stock market... And, from a sentiment and Fed-speak standpoint, one could argue that -- geopolitical turmoil aside -- the 2023 Q4 setup isn't all that bad... I certainly don't think that Q3 earnings results, by themselves, will pose a challenge to the near-term bullish narrative.
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So, headline CPI came in a titch hotter than expected, while core (ex-food and energy) came in bang on expectations... Stocks flinched a bit in the premarket, then settled slightly higher ahead of the open... Bonds took a bit of a hit (yields up), but, all in all, while, say, 2 weeks ago this report might've rattled markets (although the day is very young as I type, so, you never know), Fedheads seem to have, for the moment, calmed market waters with their unanimous hints that they're pretty much done hiking rates... In fact, two more overnight (just ahead of fresh CPI data no less), echoed that chorus.
We'll tackle CPI and the rest of the week's data in tomorrow's economic update.
In the meantime, here are a few key highlights from our latest messaging herein:
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On our strategy call yesterday morning, while I traveled between offices, we noticed the abrupt intraday turnaround (akin to last Friday's) in the equity market... My comment, without looking, was that it virtually had to be someone at the Fed saying something soft about go-forward monetary policy.
Sure enough, the typically-hawkish (higher rates advocate) Fed Vice Chair Phillip Jefferson essentially turned the tide with:
Goes without saying, there’s much to unfold in the days ahead related to tragic weekend events… The uncertainty will reflect across asset classes, oil and “safe havens” in particular.
Stay tuned.
Here’s your weekly sector, region and asset class results update:
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As you'll gather from this morning's video commentary (recorded last evening), yours truly was anticipating a "soft" jobs number this morning, and, as bad news is, for the moment, good news, a rallying stock market to go with it.
Well, scratch that! The number came in literally double the consensus estimate, and an astounding 100k above the most aggressive upside prediction... And, to top it off, the prior 2 months were revised up by 119k.
Now, that said, there was some softness that, when "the market" digests it, just might mitigate a bit of the premarket selloff we're seeing across equities and bonds... That softness came in what matters most in terms of inflation, average hourly earnings... They were up 0.2% month-on-month; consensus estimate had it at 0.3%.
Interestingly, gold is up .16% (silver's up 1.4%) premarket, despite a notable jump in real yields -- perhaps precious metals traders are already sniffing out that "softness" (although the morning's very young).
Anyways, here's your end of week market analysis... In this one I take you way beyond the latest action... We'll tour the past few market cycles, what worked, what didn't, and I scratch the surface on how one money manger (us) is presently addressing near-term dynamics, and what we're anticipating beyond the present cycle.
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Yes, "hiring slowdown" is consistent with economic slowdown, and, yes, "the market" is obsessively focused on the Fed, as if the thing that ultimately matters most, corporate profits, does not in fact matter.
In our view, another rate hike is highly unlikely, as it is highly unnecessary, given that leading indicators are signaling uncomfortable odds of recession (and, thus, falling inflation) in the months to come.
Among our recent video commentaries, this one from September 15th is a must-watch (at least from the 4:00 to 14:20 mark) for those interested in a historical perspective on why -- despite what current trading action might otherwise portend -- an inflation-slaying economic slowdown will be problematic for stocks, even while the Fed is cutting rates in response:
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Peruse the numbers in your weekly results update below and you'll notice, among equities, that 5 of the 11 major US sectors remain notably in the red year-to-date, while three of the positive 6 have delivered low single-digit returns... I.e., as we continue to stress, all of the heavy lifting has occurred in 3 sectors that essentially capture the half-dozen or so biggest positions in the S&P 500 and Nasdaq 100 Indexes, that, per Jim Bianco, pretty much tell the whole story:
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Here are a few key highlights from our recent messaging herein:
This Tuesday:
"...another way to view the present setup would be to recognize that -- while stocks look [to perhaps put it mildly] expensive -- bonds are beginning to look pretty (historically-speaking) cheap. Hence, my comment that, while it may still be a bit early, we'll definitely be eyeballing duration going forward."
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In last week's video update I suggested that we're keeping a very close eye on "duration," implying that assets that respond most-positively to falling rates have our attention, althoughwe’renot yet adding to any, right here...
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Call it, per Bloomberg's Michael McKee, "a unanimous hawkish pause." Yep, no rate hike at yesterday's Fed meeting, but threats of one by year-end, and projections that show monetary policy staying yet tighter for longer than they thought last time they told us what they thought.
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Among a plethora (11) of central bank meetings this week, the US’s of course will be the one most likely to move markets (although Japan's [commentary] indeed could)… With 100% certainty I’ll say that there’ll be no rate hike come Wednesday... Not because the Fed wouldn’t be justified, in fact, if Powell were indeed true to his rhetoric, there’d be one – as the latest inflation-related data conflicts with the recent disinflationary trend – it’s just that the market is discounting virtually zero odds of one.
For this morning's message we'll start by reposting Friday and Saturday's video commentaries... Both of these are we think very timely and should be viewed by anyone who’s at all interested in the current risk/reward setup for markets, and in what the latest consumer data say about the present stage of the economic cycle:
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Here's the opening to a post I penned back on April 20, 2020:
"Keynes suggested circa a century ago that trading (as opposed to, I'll say, investing in) markets is not about assessing fundamentals, it's about what traders think other traders are going to do. And for the more savvy traders, it's about what they think other traders think other traders are going to do."
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The signs for the global economy sent out by the "first mover" among the economic indicators - the sentix economic index - point to a further downturn and a strengthening of the economic downturn forces. The situation in Germany remains particularly precarious. Here we are measuring the weakest situation values since July 2020, when the economy was slowed by the first Corona lockdown. Germany is also weighing heavily on the economy in the euro zone as a whole. The recession is progressing.
But even for the USA, which has so far held up well and defied the restrictive FED policy, the economic data are falling markedly. The tipping point of a global recession is less distant than one might think.
Clients, if you haven't taken in Friday's video commentary yet, please do... I think it does a nice job describing a few of the drivers of our present assessment and overall allocation... I'll include the player at the very bottom of this note.
The following from thewidely followed/highly respected Sentix September Economic Report comports with our current view of overall general conditions:
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Today’s action in US equities screams to the still-prevailing “soft-landing” market mood… I.e., bad news is viewed as good news, because, presumably, any weakness will not land us in recession, and (or perhaps because) it’ll inspire the Fed to ease policy.
So, when this morning’s ISM Services Survey came in better than expected, stocks immediately sold off (red circle below):
As we've been pointing out during client portfolio review meetings of late, beyond whatever's left in the current cycle (our view is that odds lean toward another round of turbulence along the way), we see a number of what we believe to be very exploitable themes.
Here's the intro to our latest Equity Market Conditions internal report, along with our detailed technical assessment of the dollar:
8/31/2023 PWA EQUITY MARKET CONDITIONS INDEX (EMCI): -66.67 (-25.00 from 7/31/2023)
SP500 past 30 days, -1.77%:
SP500 Equal Weight Index past 30 days, -3.37%:
While stocks staged an impressive move over the final few days of August, the SP500 was unable to squeeze out positive results for the month… Breadth deteriorated notably, as evidenced by significantly worse results for the SP500 Equal Weight Index, as well as by the other metrics scored herein.
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"The question going forward is whether US economic resilience will continue. The latest employment data from the JOLTS survey and ADP release suggest that labor market conditions are easing amid the Fed’s aggressive tightening cycle. This trend will probably continue over the coming year and we believe that a recession is likely in 2024."
-- essentially jibes with our message in Tuesday evening's video.
And the following (continuation from the above) --
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As you've no doubt noticed if you've been perusing our weekly results updates, 2023 results, across sectors, across regions, across commodities, and even across fixed income, are -- in direction or to degree -- literally all over the place... Suffice to say that while returns from certain areas have been downright impressive, clearly, all boats are not rising with the tide -- not remotely.
Per the below, the concentration in the US equity market is, let's say, historic:
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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.
Thinking via my keyboard this morning, pondering markets and the inherent myopia that inflicts all things media, and, by extension, those who, therefore, fuss and fret over every headline, every utterance of Jerome Powell and every pundit's interpretation of every data release -- typically clinging to those assessments that satisfy their present portfolio positioning and/or their emotional and, alas, political biases -- I'm no less struck, and humbled, by it all than I was on my very first day, August 1, 1984.
Kicking off what will be another shortened week here on the blog (no posts this Thursday and Friday), we'll take a quick look at how our PWA Index scored for last week, followed by your sector, region and asset class update, then the usual morning stuff.
Well, it's that time of year again where I go on a brief Montana fishing excursion with my good friend who inspired an essay (featured below) years ago that a number of clients told me was their all-time favorite... Being that it has absolutely nothing to do with investing, says... well, huh, I'm not sure what it says 🤔.
So, this'll be it for me on the blog this week.
Before we get to the sentimental stuff -- and, please, don't feel obliged to read if you're in no sentimental mood -- here's a quick video technical update on the S&P 500, the Nasdaq 100 and Apple (and some not so rosy stuff on the state of the economy), followed by your weekly sector, region and asset class results update.
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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.
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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.
Yesterday morning's live BCA Research discussion featured a back and forth that I thought pretty well captured what are legitimate bullish and bearish, policy-centric, economic narratives.
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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.
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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.
I've heard it said recently that there's never been a bear market rally that's lasted longer than the initial bear market decline (correcting my earlier statement)... Suggesting, therefore, that this isn't a bear market rally at all, that it's indeed a new sustainable bull market.
I also read that strings of consecutive up days for the Dow, the likes of which just ended late last week, have historically been met with positive returns over the ensuing 12 months, save for only one occurrence, in 1987.
And I'm certain there are a whole host of other never-happened-in-a-bear-market statistics that suggest indeed that the road ahead is clear and that we should all be backing up our trucks to the stock market and loading em up, right this minute!
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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.
Per the possibility I mentioned in this morning’s commentary (recorded last evening), PCE inflation data came in soft this morning; supporting equity prices. The bulls need this one to hold — a repeat of yesterday’s fail would be near-term dicey. My guess is it will (hold), but we’ll see.
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While present stock market levels, and recent action, seem bewildering to some, when we consider the soft-landing narrative that many are now embracing (along with the other points I've made herein of late), and the history of rallies closely preceding past recessions, in reality, it’s not all that puzzling how things -- non-fundamentally driven as they may be -- have played out since last October’s bottom.
Now, per BCA’s Doug Peta, IF a mild recession scenario ultimately plays out and we see a 15% hit to corporate earnings (a typical recession brings a ~25% hit), and were stocks to maintain their 20ish price-to-earnings ratio (p/e), the SP500 would experience a 15% decline… But of course a 20 p/e could be very fragile in a double-digit market selloff… I.e., a mere 15% hit to stock prices amid even a mild recession would be quite the optimistic scenario.
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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.
