Tuesday, June 19, 2018

A Little Perspective And Balance Would Be Useful

Much of what has been discussed on financial news networks over the course of the past several days has centered on tariffs and the escalation into a potentially larger trade war. This is the type of negative news that the media enjoys pounding into its readers and listeners. Of course one should not put their head in the sand about potential consequences of an all out trade war, which we believe will not unfold though. To date the amount of product being impacted is just .25% of our economy. Adding some balance to the tariff discussion and the broader impact to the markets would be helpful. The one outcome I heard repeated today is the Dow Jones Index return is now slightly negative for the year. What about some of the broader indices though?

Below is a year to date chart showing the return of several indices and ETF's that represent the S&P 500 Index, the S&P Midcap Index (IJH), the S&P Small Cap Index (IWM) and the MSCI Emerging Markets Index (EEM). Clearly, all is not bleak. The small cap index is up 10.85% this year through the close on 6/19/2018. The nearly half year return for midcap stocks is a respectable 5.52% and the S&P 500 Index remains up 3.33%. Emerging markets have been the weak link and partially due to the tightening monetary policy in the U.S which I discuss a little later.


After the market peak and sell-off that began at the end of January, the S&P 500 Index has traded in about a 200 point trading range as reflected by the box outline in the below chart. In addition to the sideways trading range, the shorter term market trend is moving higher within an increasingly tighter channel. The continuation trend hinges on whether the market breaks through the red resistance line to the upside or falls below the green support line.


A shorter time frame of the above chart that uses year to date percentage return can be seen below.


One last market chart of the S&P 500 Index is detailed below with the candlesticks reflecting price movement on a monthly basis. After the strong January performance both February and March were down months (red candles) while April, May and so far in June have been up months for the S&P 500 Index.


In a post I wrote in late May, Only The Good News, I discussed some positive economic and earnings charts. I will not repeat that content here; however, as it relates to the consumer, economy and earnings, much of this data is positive. Below is a chart that reflects the earnings revision ratio since the end of last month and upgrades continue to exceed downgrades.


Finally, if there is one area that merits keeping a close eye on it is market interest rates. While we continue to believe the yield curve does not invert near term, the below chart is certainly beginning to challenge that point of view as the curve has flattened to 35 basis points.


This flattening of the yield curve and more directly the Fed's continued monetary tightening is impacting emerging markets. Compounding the tightening impact is the impact tax cuts are having on the flow of US Dollars. This was discussed by Reserve Bank of India governor, Urjit Patel, in a recent article from the Business Standard, as he believes and notes:
"The US Federal Reserve should slow down its plans to shrink its balance sheet. Or else, the deluge of US treasury issuance to fund tax cuts will dry up the dollar liquidity globally, said Reserve Bank of India (RBI) governor Urjit Patel in an article in the Financial Times." 
"Given the rapid rise in the size of the US deficit, the Fed must respond by slowing plans to shrink its balance sheet. If it does not, treasuries will absorb a large share of dollar liquidity. This will lead to a crisis in the rest of the dollar bond markets." 
"the issue stems from Fed’s “long-awaited moves to trim its balance sheet and a substantial increase in issuing US treasuries to pay for tax cuts."
The potential repercussions to the equity market and economy that fall out of the tit-for-tat tariff battle makes the issue one investors need to keep in the forefront. However, as one looks at the economic, company level and consumer data, the positives currently outweigh the negatives at the moment. Unfortunately, positive news usually does not attract viewers and readers to the media publications; therefore receives much less attention from the media.


Tuesday, June 12, 2018

Small Business Optimism: 2nd Highest Level In 45-Year History

Today, the National Federation of Independent Business (NFIB) reported the May Small Business Optimism Index increased to the second highest level in the survey's 45-year history. The May reading increased 2.6 points versus the April reading and exceeded the high end of the consensus range.



Econoday reports:
"the rise in optimism among small business owners was broad-based, with 8 of the 10 components of the index showing improvement. Contributing to the overall gain were plans to increase inventories, which rose 3 points to a net 4 percent, earnings trends, rising 4 points to net 3 percent and a survey record, plans to make capital outlays, up 1 point to a net 30 percent, and expected credit conditions, which rose 1 point but remained negative at a net minus 5 percent."
Four out of last seven highest NFIB readings have occurred in the last eighteen months. As the below chart shows, historically, 1-year subsequent returns for the S&P 500 Index have generally been strong following high levels of small business optimism. Going forward I will include tracking of the equity market's performance based on this new high reading as well.


Sunday, June 10, 2018

Another Look At Growth Versus Value

Writing blog commentary serves as a permanent record of one's thoughts at a specific point in time. When reflecting back on earlier posts, expectations and conclusions do not always unfold in the market or economy as anticipated and written about at that time. The benefit is one can adjust future thinking and conclusions if necessary. Sometimes events occur that one simply could not anticipate and the events result in a change of direction in the market. All investors would benefit in tracking how they arrived at their investment decisions..

It seems over the last few weeks there has been much written about the outperformance of growth stocks versus value stocks. The extended outperformance of growth over value has pushed the relative valuation to a high for the growth style and a low for the value style and was referenced with a chart in the June monthly presentation by State Street Global Advisors. The below chart is a slightly different version but shows the higher relative valuation of large cap growth versus large cap value at this point in time.


Wednesday, June 06, 2018

One Chart Will Not Predict The Next Recession

I had the fortune to read an article yesterday, Uh-oh: Unemployment Falls Below 4%, that noted,
"On each occasion that the unemployment rate sank beneath 4%… recession was soon on tap. To remind, it now rests at 3.8%. But why should recession rapidly follow peak employment?"
The article included the below chart and provided several reasons that would seem to justify the fact a recession is near when the unemployment rate is below 4%. Often times these scary or miracle charts are highlighted in an attempt to scare investors out of the market.



Sunday, June 03, 2018

Record Levels Of Strength In Economic Sentiment Reports

As regular readers of this blog know, from time to time I opine on investor sentiment whether it is the AAII Sentiment Survey, the Investor Intelligence Advisors' Sentiment report or the NAAIM Exposure Index. At the moment, suffice to say that these 'investor' sentiment reports are neither overly bullish or overly bearish and conclusions drawn from them are most useful when the data are at extremes. Below is a chart of last week's bullish reading from the AAII Sentiment Survey and its current reading falls between + and - the one standard deviation levels.



Sunday, May 27, 2018

Only The Good News

As seems often the case, it is the bad news that leads headlines and garners the attention of those interested in digesting news reports. In the current economic environment though it seems somewhat difficult to promote the bad news when there seems little of it. I am not saying there is no bad news, but much of the news today that is related to the market and the economy is decidedly positive, however, from my perspective this good news does not seem to get much press. So, below are highlights of some of the positive news that may be of interest to investors.

The Consumer:

The consumer segment accounts for 70% of economic growth and post the financial crisis in 2009, the consumer seems in very good shape.
  • debt payments as a percentage of disposable personal income is lower than the pre-financial crisis level and below the level at the beginning of 1980.


Saturday, May 26, 2018

Potential For A Stronger Second Half In Stocks

Seems as though much has taken place in the first five months of this year that is newsworthy and impactful to the markets, i.e. Iran, North Korea, tariffs, an increasing 10-year yield, and I could go on. With the volume of news flow though, the equity market has essentially traded sideways this year with the S&P 500 Index price return equaling just 1.78%.



Sunday, May 20, 2018

Dollar Strength Leads To Large Cap Stock Outperformance

A recent strengthening of the US Dollar has some investment commentary now favoring small cap stocks over large cap stocks. This is partly due to the earnings headwind that can negatively impact multinational companies as they convert foreign earnings back into the Dollar. One recent report titled, Rising Treasury Yields And Dollar Completely Change Investment Themes, noted:
"The resumption of the bull market has taken shape in the form of small caps. I fully expect that the rest of the market will follow suit eventually, but rising treasury yields and the surging dollar have money rotating feverishly into smaller companies and that relative strength is likely to continue."
In the below chart, a downward trending red line indicates small cap stocks are outperforming large cap ones. In 2018 small cap stocks have outperformed large cap stocks while the US Dollar Index (DXY) has risen from below 90 to almost 94.


Thursday, May 03, 2018

Investor Sentiment Continues To Be Less Bullish

This week's Sentiment Survey report from the American Association of Individual Investors continues to show a falling trend in the level of bullishness of individual investors. This week's bullishness reading was reported at 28.4% and down from 36.9% in the prior week. The current bullishness reading is near the minus 1 standard deviation level and these sentiment measures are most useful as a contrarian indicator at extremes. In January of this year the bullishness reading reached near 70% and subsequent market returns have trended lower since then. AAII published an article, Is the AAII Sentiment Survey a Contrarian Indicator?, that provides insight into the market's return at various sentiment levels.



Heightened Volatility A Result Of The Change In The Earnings Growth Rate

Investors are experiencing a market exhibiting a higher level of volatility. This heightened volatility is more normal than the lack of volatility experienced in the few years leading up to 2018 and yet the S&P 500 Index is down less than 2% this year.



Wednesday, April 25, 2018

Consumer In Decent Shape, A Positive For Continued Economic Growth

In spite of the market's negative reaction to some of the recent earnings reports issued by credit card companies, one might think the individual consumer is in pretty bad shape. To the contrary though. About a year ago I evaluated the consumer as a result of issues surrounding some of the credit card firms. As was the case in the earlier blog post, the consumer data today is indicative of a consumer that is not overly burdened with debt repayment.

The following three charts provide a visual picture of the debt service burden on consumers along with various charge-off and loan delinquency rates. The first chart represents the Household Debt Service Ratio which is debt payments as a percentage of disposable income. The current ratio of 10.3% is just slightly above the year ago level of 10% and remains below levels seen at the beginning of prior recessions.