Last week we put out a succinct mid-quarter update in which we highlighted 9 negative inputs into a tactical equity framework. This post builds upon that by calling out 7 rather conspicuous divergences that are developing in the financial markets.

The bank stocks are at it again as they make another new 52-week relative performance low compared to the broad market. It’s a perennial issue. Over the last year the KBW Bank Index, an index of 24 of the largest US banks, has underperformed the S&P 500 by 30%.

When it comes down to it, there are a few key macro variables that are highly correlated with the relative performance of value vs growth – most of them measuring the reflationary impulse in the system in different ways.

Over the weekend the world learned of the Senate Republican’s “opening bid” for the next round of fiscal stimulus in the United States. That number came in at a nice, round $1tn. Now, as large as that number is, it still pales in comparison to the $3.5tn House bill that already passed.

Here we are in the dog days of summer, and the hot weather is not the only thing making us a little queasy. The darling stock market group since 2011, the Nasdaq 100 stock index, has soared a cool 20% this year and well into all-time high territory. Indeed, the height is making us queasy from vertigo.

With the US dollar index recently having completed a so called “death cross”, we thought it would be a good opportunity to review the investment implications of a potential trend change in the USD.

Regular readers of our content know that we have been building the case for several years now on why gold deserves a place in diversified portfolios.

The returns of the 2009-2020 bull market were nothing short of extraordinary. From the 2009 low in the S&P 500 to the 2020 high, stocks gained a massive 488%, or nearly 18% on an annualized basis.

Even as the stock market chugs up the wall of worry, we were reminded today that the economic fundamentals remain mired in simply unprecedented territory.

As I write this note on a dreary Friday afternoon from Boulder, CO I am reminded of my town’s origin. Its first non-native settlers established the town 1858 as a base camp for gold and silver miners.

Given the surge in unemployment claims over the last month the US unemployment rate is expected to rise to 16% in April from just 4.4% in March. Shocking as that number is, we have no problem with that forecast.

We are beginning to see some important divergences develop between the stock market and other data that suggest we are not out of the woods yet.

Energy companies are facing a life or death moment in 2020 with the price of WTI crude oil falling to $13.64/barrel as of this writing. Indeed the collapse in energy prices combined with poor fundamentals leading into the COVID crisis make most of the oil…

Back in the good ole’ days of mid-January, asset allocators could look to long-duration US government bonds as a refuge for stormy weather. Those days are no longer.

Anyone reading this post already knows that palpable panic has set into equity markets over recent days. We present these charts to highlight the extreme nature of the selloff so far, and as a reminder of the rarity of these events. In times like this, it’s important to remind oneself that these kind of extremes are transient and often present, at the very least, unique tactical opportunities.

Watching while the largest equity market in the world falls by a whopping 8% in four trading days brings us back to the 2008-2009 meltdown period of the financial crisis. Normally an 8% drop in such a short time frame would present an interesting intermediate-term buying or rebalancing opportunity outside of a recessionary environment.

This week’s breakout in gold is an epic expression of our times in which potential economic problems are quickly followed by massive actual and expected responses by central banks and governments. The problem de jour (for both markets and the public) is of course the real and scary health and economic consequences of a further spread COVID-19.

Regular readers of this blog and of our other commentary know that we have been looking for some kind of cyclical rebound in economic activity starting in the first quarter of 2020.

As dangerous as the virus is, we believe financial markets face a larger risk from the impending economic slowdown the virus will create due to the massive quarantine effort of China underway.

There are a number of factors that have us tactically concerned about a period of over-exuberance among equity investors. Those include record low put/call ratios and extreme inflows into equity ETFs. But among the more troubling facts of late is the breakdown in breadth we are witnessing even as the equity markets rally to new cycle or all-time highs.

Unless something dramatically changes in the final few days of 2019, the 4th quarter for equity market performance will be one to write home about. The S&P 500 is currently on track to deliver about a 9% price return, which would be the second best quarterly performance in the last five and a half years.

For the last several months we’ve been talking about the distinct possibility of a period of foreign equity outperformance that investors would be remiss to miss.

Even as left tail risks to US and global economic growth seem to have been mitigated over recent weeks (more accommodate financial conditions, rising of some PMI data, worst case trade outcome seemingly a lower probability now), incoming data continue to suggest the nadir of this slowdown cycle has not yet been reached.

Investors were unfortunately treated to a rather disappointing package of October Chinese economic data. Three of the most important hard data series were reported: fixed asset investment, industrial production and retail sales.

As each day passes and more evidence of some sort of bottom in economic activity emerges, the chances of market rotation into the more beaten down areas of the global equity market would seem to be rising.

I wrote a week ago about how international equities may be finally getting the help they need to break the back of a long-term underperformance trend. It’s a trend that has caused international stocks to underperform US stocks in eight of the last eleven years.

EAFE stocks, those in the developed Europe and Asia regions, have underperformed US stocks in eight of the last eleven years. That batting average might be decent if you are a professional baseball player, but not so much if you are a professional investor.

Last week the Federal Reserve announced the re-commencement of large scale asset purchases in order to alleviate funding pressures that had been bubbling for several months.

United States and indeed global economic data have been weak – at least that is the unabated message from the PMI data that were released this week on both manufacturing and services. At this stage everyone knows the survey data, or “soft” data, are weak.

At some point the global economy will get a dose of reflation. Whether that comes from the current central bank easing cycle, fiscal policy response, coordinated fiscal-monetary action, or a détente in the US-Sino trade dispute is not yet known.

With interest rates on the 10-year US treasury bond having moved nearly 50bps higher over the last 10 days it is certainly worth asking the question if we’ve seen the low in interest rates or whether this is more of a correction in an ongoing downtrend in rates.

Over the last few days investors have been given a good amount of information to digest from incoming economic data, Federal Reserve meting minutes, and Fed speakers opining about monetary policy at the annual Jackson Hole conference. Even still, everyone is waiting on THE speech from Fed Chairman Powell tomorrow to set to the expectations for the Fed’s upcoming meeting in mid-September.

How in the heck can the 30 year Treasury bond yield be trading at just 1.97%, an all-time low, when just 10 months ago it was up at 3.46% and “breaking out” to the upside?

Today’s news of 10% tariffs on the remaining $300bn of imports from China took markets by storm today with US stocks moving from a 1% gain to almost a 1% loss on the day. Meanwhile, gold closed at a 6-year high of $1445.

When the US government gets near its statutory debt limit, congress must lift the debt limit in order for the Treasury to continue to issue debt to pay for government expenses. Simple enough.

We have been surprised over recent weeks to read a slue of commentary proclaiming that the economy is in great shape and Fed Chairman Powell is just pandering to markets by signaling rate cut(s) in July and beyond.

In this post we’ll highlight how this payroll report could either beat or miss expectations and what each case could mean for bonds, stocks, the USD and gold.

To cut or not to cut is no longer the question. Now the question is the quantity, magnitude and timing of rate cuts for the rest of the year.

A few days of trading certainly does not make a trend, but we have our eyes on the nuanced message coming from the market – a message that has yet to give us an all clear signal.

As expectations for a Fed easing cycle have gained momentum, we’ve seen an abundance of comparisons between the current period and the late 1990s.

In today’s report, we will address one of the asset allocation implications of those factors, namely that long-term US Treasury bonds could have a substantial downside in yield even from these levels.

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.

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.”.

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.